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Basics of Accounting
Basics of Accounting
Basics of Accounting
of Accounting
What is Accounting?
Accounting is the process of recording,
classifying, analysing & interpreting the
business transactions which can be
measured in terms of money.
Business Transactions
Journal Entries
Ledger Accounts
Trial Balance
Final Accounts
Types of assets:
Fixed Assets
Current Assets
Investments
Basic Terms
Fixed Assets:
These are assets purchased for a long period i.e.
more than 1 year.
Eg:
Owner’s capital
Borrowings
Creditors
Payables
Basic Terms
Types of liabilities;
Eg:
Income from sales of goods,
Fees from sale of services,
Interest and dividends on investments,
Cash discounts,
Rent received,
Gain from sale of investment
Basic Terms
Expense:
Many expenses are incurred in the course of
business activities.
Eg:
Raw material purchased,
Wages and salaries,
Power and fuel,
Office rent,
Advertisement expense,
Loss on sale of investments
Financial Performance
Excess of income over expenses is known as
net profit.
= Capital – Drawings
+ Income - Expenses
Accounting Process or Cycle
Documentation &
Recording
Journal Entries
Personal accounts
Accounts of natural persons like Mr. Ramesh, Mr. Suresh, etc.
Accounts of legal persons like companies, banks, government,
etc.
These persons are generally the buyers, sellers, lenders,
investors, etc. associated with the company.
In short they are debtors or creditors.
Types of Accounts
Real / Permanent accounts
These are accounts of various assets and goods.
Debit Balance:
An account has a debit balance when the total of debit side
is more than the total of credit side.
Rule 1:
“ Debit all expenses and losses & credit all
revenues, incomes & gains. ”
The 3 main rules
For personal accounts
Rule 2:
“ Debit the receiver and credit the giver.”
The 3 main rules
For real accounts i.e. for assets and goods
Rule 3:
“ Debit what comes in and credit what goes out.”
Method of debiting and
crediting
1. Determine accounts associated with the
transaction.