Basic Accounting
Accounting: It is an art of recording, Classification and summarizing in significant manners and
in terms of money, transactions and events which are of financial character and interpreting the
result thereof.
There are Two types of accounts.
Types of Account
Personal (P) A/c Impersonal (P) A/c
Real A/c Nominal A/c
• Personal A/c (व्यक्तिगत खाता) :- This account dealing with and individual or accounts
of corporate bodies or institutions which are recognized as personal in business dealing
E.g. Customer, Creditors, Owner, Firm, Capital etc.
Rules of personal A/c
Dr. The Receiver
Cr. The Giver
• Impersonal A/c
i.) Real A/c (वास्तवीक खाता) :- These are accounts of things, materials, assets &
properties. It has a physical existence which can be seen & touched. Ex. Cash, Sale,
Purchase, Furniture, Investment etc.
Rules of Real Account.
Dr. What comes in.
Cr. What goes out.
ii.) Nominal A/c (अवास्तववक खाता) :- Nominal account is the account of services received
(expenses and losses) and service given (income and gain) Ex. Salary, Rent, Wages,
Stationery etc.
Rules of Nominal Account.
Dr. All Expenses and loss.
Cr. All Income and gain.
Main Rules of Debit and Credit
a. Debit (Dr.) :- The receiving aspect of a transaction is called debit.
-Debit the receiver
-Debit what come in
-Debit all the expenses & losses
b. Credit (Cr.) :- The giving aspect of a transaction is called credit.
-Credit the Giver
-Credit what goes out
-Credit all incomes and gains
Some Important Definition:-
Business Transaction: A Business transaction is “The movement of money and money’s worth
from one person to another”. Or exchange of value between two parties is also known as “Business
Transaction”.
Purchase: A purchase means goods purchase by a businessman from suppliers.
Sales: Sales is goods sold by a businessman to his customer.
Purchase Return or Rejection in or Outward Invoice: Purchase return means the return of the
full or a part of goods purchased by the businessman to his suppliers.
Sales Return or Rejection out or Inward Invoice: Sales return means the return of the full of
part of the goods sold by the customer to the businessman.
Assets: Assets are the things and properties possessed by a businessman not for resale but for
the use in the business.
Liabilities: All the amount payable by a business concern to outsiders are called liabilities.
Capital: Capital is the amount invested for starting a business by a person.
Debtors: Debtor is the person who owes amount to the businessman.
Creditor: Creditor is the person whom amounts are owed by the businessman.
Debit: The receiving aspect of a transaction is called debit or Dr.
Credit: The giving aspect of a transaction is called credit or Cr.
Drawings: Drawings are the amount withdrawn (taken back) by the businessman from his
business for his personal, private, and domestic purpose. Drawing may be made in the form of
cash, goods, and assets of the business.
Receipts: It is a document issued by the receiver of cash to the giver of cash acknowledging the
cash received voucher.
Account: Account is a summarized record of all the transactions relating to every person,
everything or property and every type of service.
Ledger: The book of final entry where accounts lie.
Journal Entries: A daily record of transactions.
Trial Balance: It is a statement of all the ledger account balances prepared at the end of
particular period to verify the accuracy of the entries made in book accounts.
A trial balance is a summary of all ledger balances and helps in checking whether the transactions
are correct and balanced. If journal entries are error-free and posted correctly to the general ledger,
the total of all debit balances should be equal to the total of all credit balances.
Proffit: Excess of credit side over debit side.
Proffit and Loss Account: It is prepared to ascertain actual profit or loss of the business.
Balance Sheet: To ascertain the financial position of the business. It is a statement of assets and
liabilities.
Current Assets: It is converted into cash within a year. Ex, Bill receivable.
Direct Expenses: These are the expenses which are directly related to manufacturing of goods
Ex. Wages, factory rent, heating, lighting etc.
Indirect Expenses: These are the expenses which are directly related to the manufacturing of
goods. Ex. Salary, rent, stationery, advertising, printing etc.
Depreciation: Decrease the value of the assets.
Sundry Debtors: The person who is the receiver or customer.
Sundry Creditors: The person who gives our supplier.
❖ Dividend Income: Dividend income is distributed to the company’s shareholders. The
dividends are distributed from the company’s earnings or profit and are a way to earn
money from own share, in simple words it is a reward given by the company to its
shareholders for investing in their shares.
❖ Suspense Account: A suspense account is an account of the general ledger that is used for
the temporary recording of business transactions. The need for a suspense account arises
due to the inability to identify the appropriate ledger account for the recorded transaction.
❖
❖ Demand Loan: A demand loan is a lending option where the repayment tenor is not fixed
but usually comes with a shorter period. It is usually extended to meet short-term business
requirements, such as maintaining working capital, purchasing expensive machinery, etc.
❖ Term Loan: Loan provided to create the fixed asset for manufacturing /service/trading
and to meet working capital requirement to run the business units. Manufacturing units,
Hospitals, Schools, Hospitals, Importer/traders can avail this loan.
❖ Hire Purchase Loan: Hire purchase is a way to finance buying a new or used car. You
(usually) pay a deposit and pay off the value of the car in monthly instalments, with the
loan secured against the car. This means you don't own the vehicle until the last payment
is made.
❖ Secure Loan: Secured loans are loans that are secured by a specific form of collateral,
including physical assets, such as property and vehicles, or liquid assets, such as cash. Both
personal loans and business loans can be secured, though a secured business loan may also
require a personal guarantee.
❖ Unsecure Loan: Unsecured Loan is a loan that does not require you to provide any
collateral to avail them. It is issued to you by the lender on your creditworthiness as a
borrower. And hence, having an excellent credit score is a prerequisite for the approval of
an Unsecured Loan.
❖ Funds Flow Statement: The fund flow statement is a financial statement that records the
inward and outward flow of business funds or assets. It identifies the reason for a change
in the financial position of a company by comparing two years' balance sheets.
❖ Cash Flow Statement: A cash flow statement is a financial statement that provides
aggregate data regarding all cash inflows that a company receives from its ongoing
operations and external investment sources. It also includes all cash outflows that pay for
business activities and investments during a given period.
❖ Letter of Credit (LC): A Letter of Credit (LC) is a document that guarantees the buyer's
payment to the sellers. It is issued by a bank and ensures timely and full payment to the
seller. If the buyer is unable to make such a payment, the bank covers the full or the
remaining amount on behalf of the buyer.
❖ Real-Time Gross Settlement (RTGS): RTGS, short for Real-Time Gross Settlement is a
real-time payment system that allows instant electronic money transfers between bank
accounts in India. RTGS transactions are settled one by one, without combining debits and
credits in a central bank's records.
The Accounting Equation
Assets = Liabilities + Capital
Properties that are owned Amount Owned to Outsiders The amounts that owners,
and have money value. have paid or have reinvested.
Cash Creditors Capital
Furniture Expenses payables Additional
Shop Loan Liability Capital
Machinery Current Liability Retained Earning
Land & Building Accounts Payables
Debtors Others
Account
Receivables
Others
❖ Retain Earnings: Retained earnings are the cumulative net earnings or profits of a
company after accounting for dividend payments. As an important concept in accounting,
the word “retained” captures the fact that because those earnings were not paid out to
shareholders as dividends, they were instead retained by the company.
Retained earnings are the amount of profit a company has left over after paying all its direct
costs, indirect costs, income taxes and its dividends to shareholders.
Formula
RE = RE0 – NI - D
RE= Retained Earnings
RE0= Beginning Retained Earnings
NI= Net Income Proffit or Loss
D= Dividend
FURTHER SIMPLIFIED…
Assets Liabilities
Current Assets Current Liabilities
• Benefits will be realized within 12 • Amount has must be paid within
months. 12 months.
Non-Current Assets Non-Current Liabilities
• Benefits will be realized for period • Payable amount can be paid
longer than 12 Months. after 12 months or even longer
than that.
Capital
Paid up Capital
Reserve & Surplus
It Includes capital or money invested in
It includes the amount or profit not
business by shareholders initially or
distributed in earlier year and current year.
afterwards.
Income and Expenses
• Income: Generally, you must include in gross income everything you receive in payment
for personal services. In addition to wages, salaries, commissions, fees, and tips, this
includes other forms of compensation such as fringe benefits and stock options.
Sales/Revenue
Discount Received
Others.
• Expenses: An expense is an item requiring an outflow of money, or any form of fortune in
general, to another person or group as payment for an item, service, or other category of
costs. For a tenant, rent is an expense. For students or parents, tuition is an expense.
Salary Worker
Purchase
Discount Allowed
Repair of Fixed Assets
Internet Bills
Others.
Debit & Credit Rules
Debit (Dr.) Credit (Cr.)
Assets Liabilities & Capital
Balance
Sheet
Assets Increase-Debit Liability Decrease-Debit
Assets Decrease-Credit Liability Increase-Credit
Expenses Income
Profit & Loss
All Expenses Are-Debit. All Income Are-Credit.
Treatment in Accounts: Assets
1. Assets: -
When there is an increase in assets such asset accounts are debited. Dr.
When there is a decrease in assets, such assets account is credited. Cr.
Event: Result Entry
Buys a Shop Increase in Assets Debit Shop’s Account
Pays to buy a shop Decrease in Assets Credit Cash Account
Buy’s the Furniture Increase in Assets Debit Furniture’s Account
Receives a Cheque Increase in Assets Debit Bank’s Account
Treatment in Accounts: Liabilities
2. Liabilities: -
When there is a decrease in liabilities, such liabilities account is debited. Dr.
When there is an increase in liabilities, such liabilities account is credited. Cr.
Event: Result Entry
Takes a Loan from Bank Increase in liability Credit Bank Loan Account
Repays Loan to Bank Decrease in liability Debit Bank Loan Account
Need to Pay Party’s Increase in liability Credit Party’s Account
Need to Pay Bill’s Increase in liability Credit Payable Account
Treatment in Accounts: Capital
3. Capital: -
When there is a decrease in capital, such capital account is debited. Dr.
When there is an increase in capital, such capital account is credited. Cr.
Event: Result Entry
Invest in Business (ABC) Increase in Capital Credit Capital Account
Invest in Business (XYZ) Increase in Capital Credit Capital Account
Treatment in Accounts: Capital
4. Income: -
Whenever a business generates an income or gain, such income account is credited.
All Income = Credit
Event: Result Entry
Goods Sold to ABC Income Credit Sales Account
Service Charge (Delivery) Income Credit Delivery Income Account
Discount Received From (ABC) Income Credit Discount Received Amount
Treatment in Accounts: Capital
5. Income: -
Whenever a business incurs an expense, such expenses account is debited.
All Expenses = Debit
Event: Result Entry
Salary Paid to Employee Expenses Debit Salary’s Account
Repair & Maintenance Expenses Debit Repair & maintenance
Internet Bill Charge Paid Expenses Debit Internet Expenses
Discount Allowed Expenses Debit Discount Allowed Account
Other Expenses
❖ Prepared Insurance: - The term prepaid insurance refers to payments that are made by
individuals and businesses to their insurers in advance for insurance services or coverage.
Premiums are normally paid a full year in advance, but in some cases, they may cover more
than 12 months.
The firm is working on advanced orders received from its buyers and has a roaster for the
number of goods to be shipped. The firm can pay an insurer an advance premium for all
the goods they expect to manufacture and ship through the year.
❖ Depreciation: - The monetary value of an asset decreases over time due to use, wear and
tear or obsolescence. This decrease is measured as depreciation. Description: Depreciation,
i.e. a decrease in an asset's value, may be caused by a number of other factors as well such
as unfavorable market conditions, etc.
Difference Between Direct Expenses and Indirect Expenses.
Meaning of Direct Expenses:
The expenses related to the production process or purchase of goods are called direct expenses. In
other words, all expenses have a direct relation with the process of production of goods and
purchase of goods. These expenses are separated to calculate the Gross profit of the business in a
particular financial year. These expenses differ as per the model of business. We are further
classified the into two major subcategories explained as follows: -
1. For the Manufacturing Business Model
2. For the Trading Business Model
List of Direct Expenses: -
Manufacturing Business Model
1. Purchase of Raw materials
2. The wages paid to the factory worker.
3. Factory staff salary
4. Factory Lighting and Heating
5. Freight or Carriage Inwards
6. Octroi on the Purchase of Raw Materials
7. Factory Rent
8. Factory Utilities
9. Factory Building Insurance
10. Depreciation on Plant and Machinery
11. Equipment setup costs
12. Equipment Repair and Maintenance
13. Factory Suppliers
14. Factory small tools and die charged to expenses.
15. Import Duty
16. Custom Duty
17. Dock Charges
18. Fuel, Gas and Water
19. Royalty
20. Packaging Materials or charges
21. Commission on Purchase
In Trading Concern
1. Purchase of Goods
2. Freight or Carriage Inward
3. Octroi on the Purchase of Goods
4. Unloading of Goods
5. Import Duty
6. Custom Duty
7. Dock Charges
8. Packaging Materials or Charges
9. Commission on Purchase
Meaning of Indirect Expenses: -
The Expenses not related to the production process or purchase of goods are called indirect
expenses. In other words, all expenses other than direct expenses are known as indirect expenses.
These expenses are separated to calculate the Net profit of the business in a particular financial
year.
List of Indirect Expenses: -
1. Salary of the office employees
2. Electricity Bill
3. Rent
4. Taxes
5. Freight or Carriage Outwards
6. Travelling Expenses
7. Printing and Stationery
8. Postage and Telegram
9. Commission paid on Sales.
10. Publicity and Expenses
11. Accounting and Auditing Fee
12. Legal Fee
13. Office Expenses
14. Repair and Maintenance
15. Staff Welfare
16. Group Insurance of Employees
17. Depreciation
18. Bad Debts
19. Office Building Insurance
20. Mobile and Telephone Expenses
21. Interest
22. Miscellaneous Expenses
23. Bank Charge
Chart of Difference between Direct and Indirect expenses
Basis of Difference Direct Expenses Indirect Expenses
The expenses related to the production The expenses not related to the production
Meaning
process or purchase of goods. process or purchase of goods.
Help in
Gross Profit Net Profit
Calculation of
Included in the
These Expenses are included in the cost These Expenses are not included in the cost of
cost of
of goods sold or produce goods sold or produce
Production
Financial
Posted in the trading account Posted in the Profit and loss account
Statement
Related to These expenses are related to Factory. These expenses are related to office.
Calculate of these expenses are needed Calculate of these expenses are needed to know
Need
to know the actual cost of production. the actual profit for the year.
