Basic Accounting Notes
1. Definition of Accounting
Accounting is the process of recording, classifying, summarizing, and interpreting financial
transactions to provide useful information for decision-making. It is often called 'the language of
business.'
2. Objectives of Accounting
• Keep systematic records of business transactions.
• Ascertain profit or loss (Performance).
• Show financial position (Assets, Liabilities, Capital).
• Provide information to stakeholders (owners, investors, creditors, government).
• Help in decision making and planning.
3. Key Accounting Terms
• Assets → Resources owned by a business (e.g., Cash, Building, Vehicles).
• Liabilities → Obligations/debts owed to outsiders (e.g., Loans, Creditors).
• Capital (Owner’s Equity) → Owner’s investment in the business.
• Revenue/Income → Money earned from business activities (e.g., sales, services).
• Expenses → Costs incurred to earn revenue (e.g., rent, salaries).
• Drawings → Money or goods taken by the owner for personal use.
4. Basic Accounting Equation
Assets = Liabilities + Capital. This equation must always balance.
5. Branches of Accounting
• Financial Accounting – Recording & reporting transactions.
• Cost Accounting – Determining cost of production/services.
• Management Accounting – Providing information for planning & control.
• Auditing – Independent examination of accounts.
6. Principles/Concepts of Accounting
• Business Entity Concept – Business is separate from the owner.
• Going Concern Concept – Business will continue in the foreseeable future.
• Money Measurement Concept – Only transactions measurable in money are recorded.
• Accrual Concept – Record revenues & expenses when they are earned/incurred, not when
cash is received/paid.
• Dual Aspect Concept – Every transaction has two effects (debit & credit).
7. Double Entry System
• Every transaction affects two accounts: One Debit (Dr.) and One Credit (Cr.).
• Golden Rules of Accounting:
• - Personal Account → Debit the receiver, Credit the giver.
• - Real Account → Debit what comes in, Credit what goes out.
• - Nominal Account → Debit all expenses & losses, Credit all incomes & gains.
8. Books of Accounts
• Journal – Book of original entry (all transactions recorded in chronological order).
• Ledger – Book of final entry (contains individual accounts).
• Cash Book – Records all cash and bank transactions.
• Trial Balance – List of all ledger balances (used to check accuracy).
9. Final Accounts
• Trading Account → Shows Gross Profit or Gross Loss.
• Profit & Loss Account → Shows Net Profit or Net Loss.
• Balance Sheet → Shows financial position (Assets, Liabilities, Capital).
10. Users of Accounting Information
• Owners & Investors.
• Creditors & Banks.
• Government (for taxes & regulations).
• Management (for decision-making).
• Employees (for wages & job security).
