Accounting – Rules of Accounting

The second rule of accounting was discussed in the previous post.

There is more to this logic, i.e. the period of benefit. Normally accounting periods define the periodicity for which, in a reasonable manner a business could declare the business affairs to the stake holder, namely, the owners / shareholders, the tax authorities and those dealing with the business on an ongoing basis. If the benefit of the transaction does not lead to a receivable / payable and is within the period, then it would be proper to use this rule and classify the item as an expense or an income as may be applicable.

Take for example the salary paid to the employees, the employees do not have to return this amount, the company would have benefitted from the work during the month, so this would be an expense.

On the other hand, a salary advance given to the employee, would be a recoverable amount, either in form of cash / bank or adjusted later against salary payable. This cannot be treated as an expense, and we will apply the first and the third rule.

I hope this is helping you understand the concepts.

I will cover the third rule in the next post…

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