ACCOUNTING PRINCIPLES:

Accounting Principles help to fill the gap and focus to bring some level of
organization in financial reporting.

Accounting Principles includes accounting concepts and conventions that help

to understand the financial statements & help management to take relevant
decision.

Accounting Principles states the common rules and regulations for recording
financial transactions and recording financial statements. Hence, they are
known as Generally Accepted Accounting Principles (GAAP)

By recording all financial transactions accounting helps in ascertaining financial

performance of the Business.

Financial statements are used by Internal as well as external users. Often users
have conflicting objectives. Thus, accounting information should be fair to all
of them without any bias.

Case studies on How Accounting Principles are applied to Business

scenario

Case Study 1: Sweet Treats Bakery

Background: Sweet Treats Bakery is a small local bakery founded by Sarah

Johnson. The bakery sells a variety of baked goods, including cakes, cookies,
pastries, and coffee. In its first year of operation, the bakery has started to gain
popularity in the community.

Business Scenario: As Sweet Treats Bakery approaches the end of its first
fiscal year, Sarah needs to prepare financial statements to assess the bakery's
performance, understand its financial position, and prepare for decisions
regarding future growth.

Objective:
Students will apply accounting principles by preparing financial statements
based on the provided transactions and information.

It will help reinforce their understanding of financial statements and the

accounting cycle.

Transactions for the Year:

1. Initial Investment: Sarah invested ₹30,000 in cash to start the bakery,

which was used to purchase equipment.
2. Equipment Purchase: The bakery purchased ovens and mixers for
₹15,000.
3. Inventory Purchases: During the year, Sweet Treats Bakery bought
ingredients (flour, sugar, butter, etc.) for ₹5,000.
4. Sales Revenue: The total sales revenue for the year is ₹65,000.
5. Operating Expenses: Expenses for the year include:

 Rent: ₹12,000
 Utilities: ₹2,000
 Salaries: ₹20,000
 Miscellaneous Supplies: ₹3,000

6. Depreciation: The equipment has a useful life of 5 years, with no salvage

value. Calculate annual depreciation based on the straight-line method.
7. Ending Inventory: At the end of the year, the bakery estimates that its
ending inventory of ingredients is valued at ₹1,000.

Tasks for Students:

1. Prepare Journal Entries:

o Have students record journal entries for each transaction listed above,
ensuring that they apply the double-entry accounting system.
2. Prepare Financial Statements:
o Based on the finalized trial balance, students will prepare:
 Income Statement
 Statement of Owner's Equity
 Balance Sheet
3. Analyze and Report:
o Students to analyze the financial statements to provide insights into the
bakery's performance. Questions to consider:
  Did the bakery make a profit or loss this year?
 What are the major expenses?
 What is the bakery's current financial position?

Note: The basic journal entry for depreciation is to debit the Depreciation
Expense account (which appears in the income statement) and credit the
Accumulated Depreciation account (which appears in the balance sheet as a
contra account that reduces the amount of fixed assets).
The formula for calculating depreciation depends on the method used:
1. Straight-line depreciation

(Asset cost - salvage value) / useful life = depreciation value per year

An office buys an office cubicle system for ₹15,000. The salvage value of the
system is ₹500, and it has a useful life of 10 years. Find Depreciation?

Formulae :(15,000 - 500) / 10 = ₹ 1,450

Accrual principles are fundamental concepts in accounting that

dictate how revenues and expenses are recognized in financial
statements. Here are some key examples:

1. Revenue Recognition Principle: This principle states that

revenue should be recognized when it is earned, regardless
of when the cash is received.
For example, if a service is provided in December but
payment is received in January, the revenue is
recognized in December.

2. Matching Principle: This principle requires that expenses

be matched to the revenues they help to generate within the
same accounting period.
For instance, if a business incurs expenses in
December to produce goods sold in December, those
expenses should be recorded in December, regardless
of when payment is made.

3. Accrued Revenues: This refers to revenue that has been

earned but not yet received by the end of the accounting
period.
 For example, a company might provide a service in
December and invoice the customer in January; the
revenue would be accrued in December's financial
statements.

4. Accrued Expenses: These are expenses that have been

incurred but not yet paid by the end of the accounting
period.
For example, if a company receives a utility bill in
January for services used in December, it would
recognize that expense in December's financial
statements.

5. Deferred Revenues: Sometimes referred to as unearned

revenues, these are payments received before services are
performed or goods are delivered.
For example, if a customer pays for a one-year
subscription in advance, the company recognizes that
revenue over the subscription period.

6. Deferred Expenses: These expenses are paid in advance

before the benefit is received.
For example, if a company pays for insurance
coverage for the year in January, it would recognize
the expense monthly over the year instead of
recognizing the entire amount at once.

These principles ensure that financial statements reflect the true

financial position and performance of a business during a given
accounting period.

Revenue Recognition Principle:

Case Study: KGN Software Company

Company Background: KGN Software Company specializes in
developing and selling custom software solutions for small to
medium-sized businesses. They often engage in long-term
contracts that involve multiple stages of development and
payments based on milestones.
Scenario: In January 2024, KGN Software Company enters into a
contract with KGN Manufacturing for a custom software solution.
 The total contract value is ₹120,000, with payment structured as
follows:

 ₹30,000 upon signing the contract (January 2024)

 ₹30,000 upon completion of the first milestone (March 2024)
 ₹30,000 upon completion of the second milestone (May 2024)
 ₹30,000 upon final delivery and acceptance (July 2024)

Apply the Revenue Recognition Principle to the above

business scenario?
Application of Revenue Recognition Principle: According to
the Revenue Recognition Principle, KGN Software Company must
recognize revenue in the period when it is earned, not necessarily
when cash is received. Here's how they would recognize revenue
under this principle throughout the project's duration:
1. Initial Payment (January 2024):
o Although KGN receives ₹30,000 at the signing of the
contract, this payment is for future services. Therefore, it is
considered deferred revenue and will not be recognized as
revenue until the company earns it.
2. First Milestone (Completion in March 2024):
o KGN completes the first milestone, which, according to the
contract, corresponds to the work completed on the
software. At this point, they recognize ₹30,000 as revenue in
their March 2024 financial statements because they have
fulfilled the conditions to earn it.
3. Second Milestone (Completion in May 2024):
o Upon completing the second milestone in May 2024, KGN
recognizes another ₹30,000 as revenue for the same reason.
This is recorded in the May 2024 financial statements.
4. Final Payment (Delivery Accepted in July 2024):
o Finally, after delivering the finished software and receiving
acceptance from XYZ Manufacturing in July 2024, KGN
recognizes the last ₹30,000 as revenue in their July 2024
financial statements.

Summary of Revenue Recognition:

 January 2024: ₹0 recognized (initial cash received treated as a
liability).
 March 2024: ₹30,000 recognized (first milestone).
 May 2024: ₹30,000 recognized (second milestone).
 July 2024: ₹30,000 recognized (final acceptance).
 Financial Implications:
This case study highlights the importance of adhering to the
Revenue Recognition Principle. By recognizing revenue when
earned, KGN Software Company presents a truthful picture of its
financial performance, which is crucial for decision-making by
stakeholders.

Matching Principle: This principle requires that expenses be

matched to the revenues they help to generate within the same
accounting period. For instance, if a business incurs expenses in
December to produce goods sold in December, those expenses
should be recorded in December, regardless of when payment is
made.

Case Study 2: Matching Principle

Company: QuickBooks & Co.
Scenario: QuickBooks & Co. incurred expenses while hosting a
financial workshop in November 2024. The workshop cost
₹10,000 for venue rental, ₹5,000 for marketing, and ₹2,000 for
catering. The workshop generated ₹25,000 in fees from
attendees.
Application of Matching Principle: According to the Matching
Principle, expenses should be recorded in the same period as the
revenues they help generate.

1. November 2024: QuickBooks & Co. incurs ₹17,000 in

expenses related to the workshop. Because the workshop
generated ₹25,000 in revenue during the same period,
QuickBooks records both the revenue and expenses in
November 2024.

Financial Statement Impact:

 Revenue: ₹25,000 (workshop fees)

 Expenses: ₹17,000 (workshop costs)
 Net Income for November 2024: ₹25,000 - ₹17,000 = ₹8,000

Cost Concept
 i. Asset is recorded at its cost in the books of accounts i.e.
price which is paid at the time of acquiring it.
ii. Asset when acquired is recorded at its cost price &
gradually reduced by way of depreciation.

Case Study : Cost Principle

Company: KGN Manufacturing
Scenario: KGN Manufacturing purchases a new machine for
₹100,000 in January 2024. Additionally, the company pays ₹5,000
for transportation, ₹2,000 for installation, and ₹3,000 for training
the staff on how to use the machine.
Application of Cost Principle: According to the Cost Principle,
assets should be recorded at their actual costs at the time of
acquisition, which includes all expenditures directly attributable to
preparing the asset for use.

1. Recording the Machine: KGN Manufacturing records the

machine at its total cost, including all additional costs
incurred to get it ready for use:
o Purchase Price: ₹100,000
o Transportation Cost: ₹5,000
o Installation Cost: ₹2,000
o Training Cost: ₹3,000

Total Cost Recorded in Balance Sheet:

 Total Asset Value: ₹100,000 + ₹5,000 + ₹2,000 + ₹3,000 =

₹110,000

Conclusion: In this case study, KGN Manufacturing accurately

reflects the total cost of the asset on its balance sheet at
₹110,000, which will be used for depreciation purposes over the
life of the machine.

Summary
These three case studies illustrate the practical applications of
various accounting principles—Revenue Recognition, Matching,
and Cost. Each principle plays a crucial role in ensuring accurate
and honest financial reporting, helping stakeholders make
informed decisions.

Conclusion:

This case study provides an excellent opportunity for students to practice

essential accounting skills while working in a realistic business scenario.