Accounting-Basics for beginners accounts

Accounting basics for beginners.

2. ACCOUNTING IS THE
LANGUAGEOF
BUSINESS
WHAT IS ACCOUNTING?

3. What are Transactions?
Inaccountingorbusinessterms,anydealingbetweentwopersonsinvolvingmoneyora
valuablethingiscalledtransaction.
WhatisaBudget?
Budgetisaplanofincome,expenses&otherfinancialoperationforafutureperiod.
ConceptofCosting
Apersonmakingorproducinganythingmustnotonlyknowhowmuchitcoststomake
butalsotohelpindeterminingthesellingprice.Itisnecessarythatthepersonnotonly
knowsthecostofwhatisbeingproducedbutalsothecostofeachcomponentwhichhas
goneintoproduction.Thecontrolofthecostsbeingincurredisalsonecessaryotherwise
thesamecanexceedtheestimates.Allthisisonlypossibleifthecostsanddatarelatingto
productionisproperlyrecordedandanalysed.Itisanexercisethatonlycarriesoutbythe
Accountant.

4. Cash and Credit Transactions
Whenthemoneyvalueofanitembeingpurchasedispaid,atthesametimewhenthe
itemisexchanged.Thetransactionissaidtobeacashtransactionorinotherwords,ifthe
valueoftransactionismetincashatthetimeofthetransactionsuchkindoftransaction
issaidtobecashtransaction.
TheBasicConceptofRecordKeeping
We can maintain a diary of transactions and note the daily transactions like sale,
purchase etc. in it.
ProblemsFacedinMaintainingDiaryofTransactions
How will we come to know the income and expenses from various sources? We
only have a sheet / page on which daily transactions are listed.
We do not know which product is selling better and which is not.

5. SingleEntryandDoubleEntryAccounting
Single entry accounting/Cash accounting.
Thissystemrecordsonlycashmovementoftransactionsandthattoouptotheextentof
recordingoneaspectofthetransactions.
Double entry book keeping/Commercial accounting.
Doubleentryorcommercialaccountingsystemrecordsbothaspectsoftransactioni.e.
receiptorpaymentandsourceofreceiptorpayment.Italsorecordscredittransactions
i.e.recordingofElectricity
BilloraccrualsofSalarypaymentetc.

6. CAPITAL.
CapitalistheinvestmentoftheOwnerinthebusiness.
MoneyValueofTime
Time spend by the owner also has value; he should be remunerated for it.
Goodwill
Thisissimplythevalueattachedtothegoodreputationearnedthroughgoodandclean
conductofbusinessoveranumberofyears.Thisgoodreputationalsohasavalueand
becomespartofinvestmentinbusiness
Budget
Budget Is an Organization’s Plan of a Future Period Expressed in Money Terms.

7. Cash Accounting and Accrual Accounting Cash
Accounting
Itistheaccountingsysteminwhicheventsarerecordedwhenactualcash/chequeis
receivedorpaid.
Let’s take the example of utility bills like electricity, telephone etc. The bill of January is
received on 15th February and paid on 25th February. If the organization is following
cash accounting practice it will record the expense of electricity / telephone on 25th
February because the actual payment is made on that day

8. AccrualAccounting
Itistheaccountingsysteminwhicheventsarerecordedasandwhentheyoccur.
example.TheelectricityisutilizedinthemonthofJanuarysotheexpenseshouldbe
recordedinthemonthofJanuary.Similarlythecompanythatisprovidingtheelectricity
shouldrecordtheincomeinthemonthofJanuary.
Income
Income is the value of goods or services that a business charges from its customers.
Expenses
Expensesarethecostsincurredtoearnrevenue.

9. ProfitorNetProfit
Net income or Net Profit is the amount by which the income exceeds expenses in a
specific time period.
Net Profit = Income —Expenses
Capital and Revenue Expenses
expenses that provide benefit immediately are called “Revenue Expenses” and those
expenses whose benefit last for a longer period are called “Capital Expenses”.
Liabilities
Liabilities are the debts and obligations of the business.

10. Separate Entity Concept
In accounting, ‘The Business’ is treated independently from the persons who own it.
Debit and Credit
Debit and Credit are two Latin words
Debit
It signifies the receiving of benefit. In simple words it is the left hand side.
Credit
It signifies the providing of a benefit. In simple words it is the right hand side.

11. Dual Aspect of Transactions
For every debit there is an equal credit. This is also called the dual aspect of the
transaction
Assets
Assets are the properties and possessions of the business.
Properties and possessions can be of two types:
Tangible Assets that have physical existence ( are further divided into Fixed
Assets and
Current Assets)
Intangible Assets that have no physical existence

12. Examples of both are as follows:
Tangible Assets —Furniture, Vehicle etc.
Intangible Assets —Patents, Copyrights, Goodwill etc.
Accounting Equation
Assets are created out of capital invested plus liability to third party.
Assets = Liabilities + Owner’s equity Rules of Debit and Credit
Increase in Asset is Debit Decrease in Asset is Credit
Increase in Liability is Credit

13. Decrease in Liability is Debit
Increase in Expenditure is Debit
Decrease in Expenditure is Credit
Increase in Income is Credit
Decrease in Income is Debit