📘 1. Introduction to Accountancy
Accounting is the process of recording, classifying, summarising, and interpreting financial transactions.
It helps to know how money is coming in (income) and going out (expenses).
Definition:
Accounting is the language of business — it tells the financial story of an organization.
Objectives of Accounting
- To record all business transactions systematically
- To find out the profit or loss during a specific period
- To know the financial position (assets, liabilities, and capital)
- To help in decision-making
- To provide information to stakeholders (owners, banks, government)
📂 2. Accounting Process
Accounting is done step-by-step. Let’s understand this flow:
| Step | Stage | Description |
|---|---|---|
| 1 | Identifying Transactions | Recognize financial events (only those that can be measured in money). |
| 2 | Recording (Journalizing) | Record the transactions in the Journal in chronological order. |
| 3 | Posting to Ledger | Transfer entries from Journal to Ledger accounts. |
| 4 | Preparing Trial Balance | Check the arithmetic accuracy of ledger balances. |
| 5 | Preparing Final Accounts | Prepare Trading, Profit & Loss Account and Balance Sheet. |
📖 3. Basic Terms and Concepts
| Term | Meaning | Example |
|---|---|---|
| Transaction | Any event that changes financial position | Purchase of goods for ₹5,000 |
| Account | A record for each type of asset, liability, income, or expense | Cash Account, Sales Account |
| Assets | What the business owns | Cash, Buildings, Machinery |
| Liabilities | What the business owes | Loans, Creditors |
| Capital | Owner’s investment in the business | ₹1,00,000 invested by owner |
| Income | Money earned | Sales revenue |
| Expense | Money spent to earn income | Rent, Salary |
| Drawings | Money withdrawn by owner for personal use | Owner takes ₹2,000 cash |
📜 4. Accounting Principles and Concepts
These are the rules that guide how accounting is done.
a) Business Entity Concept
Business and owner are separate entities.
➡️ Example: If the owner takes ₹5,000 cash for personal use, it is recorded as Drawings, not business expense.
b) Money Measurement Concept
Only transactions measurable in money terms are recorded.
➡️ Employee skill or brand reputation is not recorded.
c) Going Concern Concept
The business is expected to continue in the future.
➡️ Assets are not recorded at resale value but at cost.
d) Accounting Period Concept
Business life is divided into equal periods (usually 1 year) to measure results.
e) Cost Concept
Assets are recorded at their original cost, not current market value.
f) Dual Aspect Concept
Every transaction has two effects – Debit and Credit.
➡️ Example: Purchase goods for cash – Goods come in (Debit), Cash goes out (Credit).
g) Matching Concept
Expenses should be matched with revenues of the same period.
h) Realization Concept
Revenue is recognized when goods or services are sold, not when cash is received.
i) Accrual Concept
Record income and expenses when they occur, not when cash changes hands.
j) Conservatism (Prudence)
Record expected losses but not expected profits.
🧮 5. Double Entry System
This is the foundation of modern accounting.
Rule:
Every transaction has two aspects:
Debit (Dr) – Receiving benefit
Credit (Cr) – Giving benefit
Example:
Bought furniture for ₹10,000 in cash
→ Furniture A/c Dr ₹10,000
→ To Cash A/c ₹10,000
Both sides (Dr = Cr) are always equal.
📘 6. Books of Accounts
| Stage | Book | Purpose |
|---|---|---|
| 1 | Journal | Primary book where transactions are first recorded |
| 2 | Ledger | Contains all accounts (Cash, Sales, Purchases, etc.) |
| 3 | Trial Balance | Checks the correctness of ledger balances |
| 4 | Final Accounts | Shows financial performance and position |
✍️ 7. Journal Entries
Format:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|
Example:
Paid rent ₹5,000 by cash
Rent A/c Dr ₹5,000
To Cash A/c ₹5,000
(Being rent paid)
📗 8. Ledger
A Ledger is a collection of all accounts.
Each account has two sides: Debit and Credit.
Example (Cash Account)
| Debit Side | Credit Side | ||
|---|---|---|---|
| Date | Particulars | Date | Particulars |
| Jan 1 | Capital ₹50,000 | Jan 3 | Purchase ₹10,000 |
📊 9. Trial Balance
- It is a list of all ledger balances (both debit and credit).
- It ensures the arithmetic accuracy of books.
- Total of Debit side = Total of Credit side.
Example:
| Account | Dr (₹) | Cr (₹) |
|---|---|---|
| Cash | 40,000 | |
| Purchases | 10,000 | |
| Sales | 50,000 | |
| Total | 50,000 | 50,000 |
💼 10. Final Accounts
(a) Trading Account
Shows Gross Profit or Gross Loss
Gross Profit = Sales – (Opening Stock + Purchases + Direct Expenses – Closing Stock)
(b) Profit & Loss Account
Shows Net Profit or Net Loss
Net Profit = Gross Profit – Indirect Expenses + Indirect Income
(c) Balance Sheet
Shows the financial position of the business.
It lists Assets, Liabilities, and Capital.
| Liabilities | Amount (₹) | Assets | Amount (₹) |
|---|---|---|---|
| Capital | 50,000 | Cash | 10,000 |
| Creditors | 5,000 | Machinery | 45,000 |
| Total | 55,000 | Total | 55,000 |
💡 11. Adjustment Entries
Made at the end of the year for items not yet recorded.
| Item | Type | Example |
|---|---|---|
| Outstanding Expense | Expense not yet paid | Salary outstanding ₹2,000 |
| Prepaid Expense | Expense paid in advance | Rent paid for next year ₹3,000 |
| Accrued Income | Income earned but not received | Interest due ₹500 |
| Depreciation | Decrease in asset value | Machinery depreciation 10% |
📋 12. Common Financial Statements
| Statement | Purpose |
|---|---|
| Trading Account | To find Gross Profit |
| Profit & Loss Account | To find Net Profit |
| Balance Sheet | To show Financial Position |
🧠 13. Real-Life Example
Imagine you start a small stationery shop.
| Transaction | Effect |
|---|---|
| Invest ₹1,00,000 | Cash A/c Dr, Capital A/c Cr |
| Purchase goods ₹40,000 | Purchases A/c Dr, Cash A/c Cr |
| Sell goods ₹60,000 | Cash A/c Dr, Sales A/c Cr |
| Pay rent ₹5,000 | Rent A/c Dr, Cash A/c Cr |
At the end of the month, you prepare:
- Trading A/c → to find profit
- Balance Sheet → to see assets and liabilities
🧾 14. Errors in Accounting
| Type of Error | Meaning | Example |
|---|---|---|
| Error of Omission | Transaction not recorded | Missed entry for purchase |
| Error of Commission | Wrong account used | Rent paid entered in salary account |
| Error of Principle | Violating accounting rule | Treating capital expense as revenue |
| Compensating Error | Two errors cancel each other | Over debit of ₹500 and over credit of ₹500 |
🔧 15. Rectification of Errors
- Use Journal Entries to correct mistakes.
- If error found after Trial Balance → Suspense Account is used.
🧩 16. Depreciation
Meaning: Reduction in the value of an asset over time due to use or wear and tear.
| Method | Formula | Example |
|---|---|---|
| Straight Line Method | Cost – Scrap Value / Life | ₹50,000 asset, 10 years → ₹5,000 per year |
| Reducing Balance Method | Depreciation on Book Value | 10% each year on remaining value |
🧮 17. Provision and Reserves
| Term | Meaning | Purpose |
|---|---|---|
| Provision | Amount kept aside for known liability | Provision for Bad Debts |
| Reserve | Amount kept from profit for future use | General Reserve |
📚 18. Capital & Revenue Items
| Type | Meaning | Example |
|---|---|---|
| Capital Expenditure | Long-term benefit | Purchase of Machinery |
| Revenue Expenditure | Short-term benefit | Repairs, Rent |
| Capital Receipt | Money from owner or loan | Owner’s investment |
| Revenue Receipt | Money from operations | Sale income |
🏁 Summary
| Concept | Key Idea |
|---|---|
| Accounting | Systematic record of transactions |
| Double Entry | Every transaction has Debit & Credit |
| Ledger | Collection of all accounts |
| Trial Balance | Check accuracy of accounts |
| Final Accounts | Determine profit & financial position |
| Depreciation | Decrease in asset value |
| Provision | Liability for expected expense |
⚡ Quick Revision Points (For Exam)
- Accounting = Recording + Classifying + Summarizing + Interpreting
- Golden Rules:
- Personal A/c → Debit the receiver, Credit the giver
- Real A/c → Debit what comes in, Credit what goes out
- Nominal A/c → Debit expenses/losses, Credit incomes/gains
- Trial Balance = Debit total = Credit total
- Trading A/c → Gross Profit
- P&L A/c → Net Profit
- Balance Sheet → Assets = Liabilities + Capital
- Depreciation → Non-cash expense
- Provision vs Reserve → Provision = Expense, Reserve = Appropriation of Profit