BASICS OF ACCOUNTING
,[Type here]
Contents
Introduction to accounting ................................................................................................................................ 2
Introduction ................................................................................................................................................... 2
Meaning of accounting .................................................................................................................................. 2
Functions of accounting ................................................................................................................................. 2
Accounting Cycle ............................................................................................................................................ 3
Book-keeping, accounting and accountancy ................................................................................................. 4
Objectives of accounting................................................................................................................................ 5
Sub-disciplines within accounting.................................................................................................................. 6
Financial accounting .................................................................................................................................. 6
Cost accounting.......................................................................................................................................... 6
Management accounting ........................................................................................................................... 6
Accounting is an art as well as science .......................................................................................................... 6
Advantages of accounting.............................................................................................................................. 7
Disadvantages of accounting ......................................................................................................................... 7
Types of Accounting Information .................................................................................................................. 8
Basic accounting terms ...................................................................................................................................... 9
Accounting principles ....................................................................................................................................... 13
Bases of accounting ......................................................................................................................................... 16
Accounting equation ........................................................................................................................................ 17
Rules of debit and credit .................................................................................................................................. 19
Journal .............................................................................................................................................................. 22
Ledger .............................................................................................................................................................. 31
Subsidiary books .............................................................................................................................................. 35
Cash book ......................................................................................................................................................... 40
Trial balance and rectification of errors .......................................................................................................... 46
Financial statement of sole proprietorship ..................................................................................................... 58
pg. 1
,[Type here]
Introduction to accounting
Introduction
• The main objective of every business is to earn profit.
• At end of each year, every business wants to know how much profit they have earned or losses
occurred, how much stock they have in their warehouse, how much is business liabilities, how
much is owed to them and by whom, etc.
• So many other such questions which a businessman wants to know on a daily, monthly or annual
basis.
• In order to attain such information, it is essential to keep a complete and systematic record of each
and every business transaction entered into during the year.
Meaning of accounting
Accounting is the process of identifying, recording, classifying, summarising, interpreting and
communicating financial information of business to its users for judgement and decision making.
“Accounting is the art of recording, classifying and summarising in a significant manner and in terms of
money, transactions and events, which are, in part atleast, of a financial character, and interpreting the
result thereof.” — American Institute of Certified Public Accountants
Functions of accounting
1. Identifying: Identifying the business transactions of a financial character from the source
documents such as invoice, agreements, cash memos etc. and measure them in terms of
money.
pg. 2
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2. Recording: The next function of accounting is to keep a systematic record of all business
transactions, which are identified in chronological order of their occurrence in the journal or
subsidiary books.
3. Classifying: Classification of the recorded business transactions so as to group the transactions
of similar type at one place. i.e., in ledger accounts. In order to verify the arithmetical accuracy
of the accounts, trial balance is prepared.
4. Summarising: The classified information available from the trial balance is used to prepare
profit and loss account and balance sheet in a manner useful to the users of accounting
information.
5. Analysing: It establishes the relationship between the items of the profit and loss account and
the balance sheet. The purpose of analysing is to identify the financial strength and weakness
of the business. It provides the basis for interpretation.
6. Interpreting: It is concerned with explaining the meaning and significance of the relationship
so established by the analysis. Interpretation should be useful to the users, so as to enable
them to take correct decisions.
7. Communicating: The results obtained from the summarised, analysed and interpreted
information are communicated to the interested parties.
Accounting Cycle
The accounting cycle is the holistic process of recording and processing all financial transactions of a
company, from when the transaction occurs, to its representation on the financial statements, to closing
the accounts. One of the main duties of a bookkeeper is to keep track of the full accounting cycle from
start to finish. The cycle goes on continued till the business ends.
pg. 3
,[Type here]
Contents
Introduction to accounting ................................................................................................................................ 2
Introduction ................................................................................................................................................... 2
Meaning of accounting .................................................................................................................................. 2
Functions of accounting ................................................................................................................................. 2
Accounting Cycle ............................................................................................................................................ 3
Book-keeping, accounting and accountancy ................................................................................................. 4
Objectives of accounting................................................................................................................................ 5
Sub-disciplines within accounting.................................................................................................................. 6
Financial accounting .................................................................................................................................. 6
Cost accounting.......................................................................................................................................... 6
Management accounting ........................................................................................................................... 6
Accounting is an art as well as science .......................................................................................................... 6
Advantages of accounting.............................................................................................................................. 7
Disadvantages of accounting ......................................................................................................................... 7
Types of Accounting Information .................................................................................................................. 8
Basic accounting terms ...................................................................................................................................... 9
Accounting principles ....................................................................................................................................... 13
Bases of accounting ......................................................................................................................................... 16
Accounting equation ........................................................................................................................................ 17
Rules of debit and credit .................................................................................................................................. 19
Journal .............................................................................................................................................................. 22
Ledger .............................................................................................................................................................. 31
Subsidiary books .............................................................................................................................................. 35
Cash book ......................................................................................................................................................... 40
Trial balance and rectification of errors .......................................................................................................... 46
Financial statement of sole proprietorship ..................................................................................................... 58
pg. 1
,[Type here]
Introduction to accounting
Introduction
• The main objective of every business is to earn profit.
• At end of each year, every business wants to know how much profit they have earned or losses
occurred, how much stock they have in their warehouse, how much is business liabilities, how
much is owed to them and by whom, etc.
• So many other such questions which a businessman wants to know on a daily, monthly or annual
basis.
• In order to attain such information, it is essential to keep a complete and systematic record of each
and every business transaction entered into during the year.
Meaning of accounting
Accounting is the process of identifying, recording, classifying, summarising, interpreting and
communicating financial information of business to its users for judgement and decision making.
“Accounting is the art of recording, classifying and summarising in a significant manner and in terms of
money, transactions and events, which are, in part atleast, of a financial character, and interpreting the
result thereof.” — American Institute of Certified Public Accountants
Functions of accounting
1. Identifying: Identifying the business transactions of a financial character from the source
documents such as invoice, agreements, cash memos etc. and measure them in terms of
money.
pg. 2
, [Type here]
2. Recording: The next function of accounting is to keep a systematic record of all business
transactions, which are identified in chronological order of their occurrence in the journal or
subsidiary books.
3. Classifying: Classification of the recorded business transactions so as to group the transactions
of similar type at one place. i.e., in ledger accounts. In order to verify the arithmetical accuracy
of the accounts, trial balance is prepared.
4. Summarising: The classified information available from the trial balance is used to prepare
profit and loss account and balance sheet in a manner useful to the users of accounting
information.
5. Analysing: It establishes the relationship between the items of the profit and loss account and
the balance sheet. The purpose of analysing is to identify the financial strength and weakness
of the business. It provides the basis for interpretation.
6. Interpreting: It is concerned with explaining the meaning and significance of the relationship
so established by the analysis. Interpretation should be useful to the users, so as to enable
them to take correct decisions.
7. Communicating: The results obtained from the summarised, analysed and interpreted
information are communicated to the interested parties.
Accounting Cycle
The accounting cycle is the holistic process of recording and processing all financial transactions of a
company, from when the transaction occurs, to its representation on the financial statements, to closing
the accounts. One of the main duties of a bookkeeper is to keep track of the full accounting cycle from
start to finish. The cycle goes on continued till the business ends.
pg. 3
