Introduction to Accounting

Let's start with the basics and build a strong foundation before moving to advanced topics.

1⃣ What is Accounting?

Definition

Accounting is the process of recording, classifying, summarizing, and analyzing financial

transactions of a business. It helps in tracking income, expenses, and financial health.

Key Aspects of Accounting

1. Recording – Writing down business transactions in a systematic manner.

2. Classifying – Grouping similar transactions into categories (e.g., sales, purchases, salaries).

3. Summarizing – Preparing financial statements (like balance sheets, income statements).

4. Analyzing & Interpreting – Understanding financial reports to make decisions.

2⃣ Objectives of Accounting

Maintain Systematic Records – Keep a structured record of financial transactions.

Determine Profit or Loss – Identify whether the business is making money or losing it.
Assess Financial Position – Understand the company’s assets, liabilities, and capital.
Provide Information to Stakeholders – Helps business owners, investors, and government
agencies.
Ensure Legal Compliance – Helps in tax filing and regulatory requirements.

3⃣ Importance of Accounting

Helps in Decision Making – Business owners use financial reports to make informed choices.
Keeps track of Cash Flow – Ensures businesses don’t run out of money.
Essential for Business Growth – Investors and banks rely on accounting records to provide
funding.
Required for Taxation – Helps in calculating correct taxes.

4⃣ Basic Accounting Terms You Should Know

Let’s look at some important terms used in accounting:

Term Meaning

Assets Things owned by a business (Cash, Machinery, Land, etc.).

Liabilities Money a business owes (Loans, Creditors, etc.).

Term Meaning

Capital Money invested by the owner.

Revenue Income earned by the business.

Expenses Money spent to run the business (Rent, Salaries, Electricity, etc.).

Profit When revenue is more than expenses.

Loss When expenses are more than revenue.

Debtors People who owe money to the business.

Creditors People to whom the business owes money.

Next Step: Difference Between Bookkeeping & Accounting

Difference Between Bookkeeping & Accounting

Many people confuse bookkeeping and accounting, but they are different. Let's understand how!

1⃣ What is Bookkeeping?

Bookkeeping is the process of recording financial transactions in a systematic manner.

It involves daily recording of business transactions.

Focuses only on maintaining accurate financial records.
It is the first step in the accounting process.

Example:

 Recording sales, purchases, expenses, payments, and receipts in a journal or ledger.

2⃣ What is Accounting?

Accounting is the process of recording, classifying, summarizing, analyzing, and interpreting

financial transactions.

It includes bookkeeping but goes beyond recording.

Helps in preparing financial reports like Profit & Loss Account and Balance Sheet.
It is used for decision-making and tax filing.

Example:

 Preparing a Profit & Loss Statement to check whether a business is making money or not.

3⃣ Key Differences Between Bookkeeping & Accounting

Feature Bookkeeping Accounting

Recording daily financial

Definition Analyzing and interpreting financial data.
transactions.

Data entry and transaction Financial statements, analysis, and decision-

Focus
recording. making.

First step in the accounting Second step (bookkeeping is part of

Role
process. accounting).

Advanced knowledge of finance &

Skills Required Basic financial knowledge.
management.

Reports
Ledgers, Journals, Trial Balance. Profit & Loss Statement, Balance Sheet.
Generated

Decision Making No role in decision-making. Helps in business planning and strategy.

4⃣ Why Both Are Important?

Bookkeeping ensures accuracy – A business must have correct records before preparing
financial statements.
Accounting helps in financial analysis – Business owners need financial statements to make
decisions.
Together, they provide a complete financial picture of the business.

Next Step: Users of Accounting Information

Users of Accounting Information

Accounting information is used by different individuals and organizations for various purposes.
Let's understand who uses accounting data and why.

1⃣ Internal Users (Inside the Organization)

These are people within the business who use financial data for decision-making.

Business Owners / Management

Track the financial health of the business.

Make investment and expansion decisions.
Monitor profitability and cash flow.

Employees & Trade Unions

Employees want to know if the company is making profits and can pay salaries.
Trade unions use financial data to negotiate wages and benefits.
2⃣ External Users (Outside the Organization)

These are people outside the business who rely on financial reports.

Investors & Shareholders

Investors analyze financial statements before investing in a company.

Shareholders check profitability to see if they will get dividends.

Government & Tax Authorities

The government uses accounting data to collect taxes (GST, Income Tax, etc.).
It ensures that businesses follow financial regulations.

Banks & Financial Institutions

Banks check financial statements before approving loans.

They ensure the company can repay borrowed money.

Creditors & Suppliers

Suppliers analyze financial health before giving goods on credit.

Creditors (lenders) check if the company can repay its debts.

3⃣ Why Is Accounting Information Important for Users?

User How They Use Accounting Information?

Business Owners To monitor profits, losses, and business growth.

Investors To decide whether to invest in the business.

Employees To check job security and salary benefits.

Government To ensure tax compliance.

Banks To approve or reject loan applications.

Suppliers To decide whether to sell goods on credit.

 Next Step: Accounting Principles & Concepts

Accounting Principles & Concepts

Accounting is based on certain fundamental principles and concepts that ensure consistency,
accuracy, and reliability in financial statements.

1⃣ Basic Accounting Principles

These are the fundamental rules that guide how financial transactions are recorded.

1. Business Entity Principle

A business is separate from its owner.

The owner’s personal transactions should not be mixed with business transactions.
Example: If the owner withdraws ₹10,000 for personal use, it should be recorded as “Drawings”
in the business accounts.

2. Money Measurement Principle

Only transactions that can be measured in money are recorded.

Example: Employee skills or brand reputation are important but not recorded in accounts
because they cannot be measured in money.

3. Cost Principle

Assets are recorded at their original purchase cost, not their current market value.
Example: If a building was bought for ₹5 lakh 10 years ago, it will still be recorded at ₹5 lakh in
the books, even if its market price is ₹20 lakh today.

4. Going Concern Principle

A business is assumed to continue operating for a long time unless stated otherwise.
Example: A company does not record the value of all assets as if it is closing down tomorrow; it
assumes the business will continue.

5. Matching Principle

Revenue should be recorded in the same period as the expenses related to it.
Example: If a company sells ₹50,000 worth of goods in December but pays suppliers in January,
the expense is recorded in December, when the revenue was earned.

6. Accrual Principle

Transactions are recorded when they happen, not when cash is received or paid.
Example: If a company provides services in January but receives payment in March, the revenue
is recorded in January.
2⃣ Key Accounting Concepts

Concept Explanation

Dual Aspect Every transaction affects two accounts (Debit & Credit).

Consistency The same accounting methods must be followed every year.

Conservatism Record expenses & losses immediately but record profits only when realized.

Small expenses (like ₹10 for stationery) can be ignored in reporting, but big
Materiality
transactions must be recorded.

Full
All important financial information must be shared with users.
Disclosure

3⃣ Why Are These Principles Important?

Ensure transparency & accuracy in financial statements.

Help investors & stakeholders trust financial reports.
Provide a standard method for recording transactions.

Next Step: Accounting Equations & Rules of Debit & Credit

Complete Guide to H.S. 1st Year Accountancy (AHSEC)

This structured guide will take you from the basics to advanced concepts of Accountancy.

1. Accounting Equation & Rules of Debit & Credit

Accounting Equation

The fundamental equation of accounting is:

Assets=Liabilities+Owner’s Equity (capital)

Example: If an owner invests ₹50,000 in a business and takes a loan of ₹30,000, the total assets
of the business will be ₹80,000.

Rules of Debit & Credit (Golden Rules)

Type of Account Rule

Real Account (Assets) Debit what comes in, Credit what goes out.

Personal Account Debit the receiver, Credit the giver.

Nominal Account (Expenses & Income) Debit all expenses/losses, Credit all incomes/gains.

Example: If cash is deposited in a bank:

  Cash Account (Asset) → Credit (Cash is going out).

 Bank Account → Debit (Money is coming in).

2. Journal & Ledger Posting

Journal Entries

A Journal is the first place where transactions are recorded in a systematic way.

Example:

1. Started business with ₹50,000

o Cash A/c Dr. 50,000

o To Capital A/c 50,000

2. Purchased goods for ₹10,000 on credit from Ram

o Purchases A/c Dr. 10,000

o To Ram A/c 10,000

Ledger Posting

A Ledger is where transactions from the journal are classified into different accounts.

Example: Transactions related to "Cash" will go to the Cash Account in the Ledger.

3. Trial Balance & Rectification of Errors

Trial Balance

A Trial Balance is a list of all ledger accounts to check if debits = credits.

Account Debit (₹) Credit (₹)

Cash A/c 50,000 -

Capital A/c - 50,000

Purchases A/c 10,000 -

Ram A/c - 10,000

Rectification of Errors

Errors in accounts must be corrected.

Types of Errors:
Errors of Omission – Transaction not recorded.
 Errors of Commission – Wrong amount entered.
Compensating Errors – Two errors cancel each other.

4. Bank Reconciliation Statement (BRS)

A Bank Reconciliation Statement is prepared to match Bank Balance as per Passbook with Bank
Balance as per Cashbook.

Common Reasons for Differences:

Cheques issued but not yet cleared.
Bank charges deducted but not recorded.
Direct deposits by customers not recorded.

5. Depreciation, Reserves & Provisions

Depreciation

Depreciation is the reduction in the value of an asset due to wear & tear.

Methods of Depreciation:
Straight Line Method (SLM) – Same depreciation every year.
Reducing Balance Method (RBM) – Depreciation is charged on a reducing value every year.

Reserves & Provisions

Reserves – Profits set aside for future (e.g., General Reserve).

Provisions – Money kept aside for expenses/losses (e.g., Provision for Bad Debts).

6. Financial Statements (Trading, Profit & Loss A/c & Balance Sheet)

Trading Account

Calculates Gross Profit or Loss.

Formula:

Gross Profit=Sales−(Opening Stock+Purchases+Direct Expenses)

{Gross Profit} = {Sales} - ({Opening Stock} + Purchases} + {Direct Expenses})

Gross Profit=Sales−(Opening Stock+Purchases+Direct Expenses)

Profit & Loss Account

Calculates Net Profit or Loss after deducting expenses.

Formula:
Net Profit=Gross Profit+Other Income−Indirect Expenses\text{Net Profit} = \text{Gross Profit} +
\text{Other Income} - \text{Indirect
Expenses}Net Profit=Gross Profit+Other Income−Indirect Expenses

Balance Sheet

Shows the financial position of a business.

Formula:

Assets=Liabilities+Owner’s Equity\text{Assets} = \text{Liabilities} + \text{Owner’s

Equity}Assets=Liabilities+Owner’s Equity

7. Accounts of Non-Trading Concerns

Non-trading concerns are not-for-profit organizations like schools, clubs, and hospitals.

Important Statements:
Receipts & Payments Account – Cash received and spent.
Income & Expenditure Account – Similar to Profit & Loss Account.

8. Bills of Exchange

A Bill of Exchange is a written promise to pay a certain amount at a future date.

Parties Involved:
Drawer – The person who writes the bill.
Drawee – The person who accepts the bill.
Payee – The person who receives the payment.

Example: If A sells goods to B worth ₹10,000, A may issue a Bill of Exchange that B must pay
after 3 months.

9. Computers in Accounting

Computers are widely used in accounting to:

Automate bookkeeping.
Generate financial reports.
Minimize errors.

Example: Tally, QuickBooks, and SAP are popular accounting software.

Summary: Why Is Accounting Important?

Helps in decision-making.
Keeps track of income & expenses.
Ensures legal & tax compliance.
 Helps in raising loans & investments.
Provides a clear financial position of a business.

Final Step: Project Work & Practical Applications

You should now apply your knowledge by:

Preparing Journal Entries & Ledger Accounts.
Creating a Trial Balance & Financial Statements.
Practicing Bank Reconciliation Statements (BRS).
Understanding Accounting Software (like Tally Prime).

With this, you have mastered H.S. 1st Year Accountancy (AHSEC)!

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