Dual aspect, revenue recognition and matching

Dual aspect concept: every transaction has two sides, and both are recorded. So at least two accounts change each time, and the accounting equation always balances: Assets = Liabilities + Capital. This follows from the entity concept: once the business and owner are two, whatever comes in on one side must be owed on the other.

• Ram starts a business with ₹50,00,000 cash: cash (asset) goes up and capital goes up.
• He buys goods for ₹10,00,000 cash: stock goes up, cash goes down. The total does not change.
• He buys a machine on credit for ₹30,00,000: machinery goes up and creditors (a liability) go up.

Revenue recognition concept: revenue is recorded when the business gets the legal right to receive it, that is, when the goods are sold or the service is given, not when the cash arrives. Goods delivered in June and paid for in August are June's sale. But if the money comes in June and the goods are delivered in August, June's money is only an advance; the sale belongs to August.

Rent and interest earned are recognised by time: rent for March is March's revenue, even if it is received in April. There are two exceptions: a long building contract is counted bit by bit as the work is done, and in hire purchase the revenue is counted as each instalment is collected.

Matching concept: to find one year's profit, put that year's revenue against that year's expenses, and nothing from other years. Only the cost of the goods actually sold is set against sales; unsold goods stay as stock. A machine's cost is spread over the years it is used (depreciation), so each year carries its fair share.