Accounting Basic Notes
What is Accounting?
• Definition: Accounting is the process of recording, classifying, summarizing, and
analyzing financial transactions. It helps businesses understand their financial position
and performance.
• Purpose: The main goal of accounting is to provide useful financial information to
stakeholders, such as owners, investors, and managers.
• Accounting is an art of recording, classifying , summarizing and analyzing in
significant manner and in terms of money, transactions and events which are of financial
character and interpreting the results thereof.
• Accounting is the system of recording and summarizing business and financial
transactions and analyzing, verifying, and reporting the results.
Users of Accounting Information
• Owners – to know profit/loss
• Managers – to plan and control
• Government – for taxes and regulations
• Investors – to decide about investing
• Banks – before giving loans
Luca Pacioli is widely regarded as the "Father of Accounting." He was an Italian
mathematician
Examples
Imagine you're running a lemonade stand (lemon Water). Accounting is like keeping a
record of everything that happens with your money. It's how you track:
• How much money you make from selling lemonade.
• How much money you spend on lemons, sugar, and cups.
Accounting is a way of:
• Recording: Writing down all your money-related activities.
• Classifying: Grouping those activities (like all the sales together, all the supply costs
together [Purchase]).
• Summarizing: Adding everything up to get totals.
• Analyzing: Looking at those totals to see how your business is doing.
Essentially, it's the process of recording, summarizing, and reporting a business's money
stuff.
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Accounting Basic Notes
Objectives of Accounting
• To maintain financial records systematically
• To calculate profit or loss
• To know the financial position of the business
• To help in decision-making
• To provide financial information to stakeholders (owners, government, banks)
Features of Accounting
• Systematic Process – Done step-by-step
• Monetary Transactions Only – Only money-related activities are recorded
• Historical in Nature – Records past transactions
• Based on Evidence – Bills, invoices, receipts are required
Importance of Accounting
• Helps in budgeting and planning
• Tax filing becomes easy
• Required for loan applications
• Assists in business growth decisions
What is Business transaction?
A business transaction is “The movement of money and money’s worth from one
person to another”. Or exchange of values between two parties is also known as
“Business Transaction or Event”.
A business transaction is any activity that involves money changing hands.
• Someone gives you money for lemonade.You give money to the store(supplier) for
lemons.
Branches of Accounting-
Branch Meaning
Financial Accounting Deals with recording and reporting business transactions.
Cost Accounting Focuses on calculating the cost of producing goods/services.
Management
Provides internal reports to help managers make decisions.
Accounting
Tax Accounting Related to filing and planning taxes.
Auditing Checking the correctness of financial records.
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Accounting Basic Notes
Accounting Terminology
A. Business Basics
Term Meaning
Business An activity to earn profit by buying and selling goods or services.
Proprietor The owner of a business.
Capital Money or resources the owner invests in the business.
Drawings Money or goods taken out of the business by the owner.
Transaction Any financial activity like buying or selling.
B. Accounts Types
Term Meaning
Assets Things a business owns (cash, machines, building).
Liabilities Amounts a business owes to others (loan, bills).
Debtor Person who owes money to the business.
Creditor Person whom the business owes money.
Revenue Money the business earns from selling goods/services.
Expense Money spent to run the business (rent, salary).
C. Accounting Books & Records
Term Meaning
Journal A book to record all business transactions in date order.
A book where all similar transactions are grouped (like all rent in
Ledger
one place).
Cash Book Special book to record only cash and bank transactions.
A document that proves a transaction happened (like a bill or
Voucher
receipt).
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Accounting Basic Notes
D. Financial Statements
Term Meaning
Trial Balance A list of all accounts to check if totals are correct.
Profit and Loss Account Shows profit or loss by comparing income and expenses.
Balance Sheet Shows what the business owns and owes at a specific time.
E. Other Useful Terms
Term Meaning
Depreciation Decrease in the value of assets over time.
Inventory (Stock) Goods available for sale.
Bad Debts Amounts that can’t be collected from debtors.
Income or expense that has happened but not yet paid or
Accrual
received.
Prepaid Expense Expenses paid in advance (like rent for next month).
Accounting Cycle
1. Analyze Transactions: Figure out what happened (like a sale, or a purchase).
2. Prepare Journal Entries: Record the transaction (using debits and credits).
3. Post Journal Entries: Transfer the information to the Ledger.
4. Prepare Trial Balance: List all the accounts to check if debits = credits.
5. Make Adjusting Entries: Update accounts.
6. Prepare Adjusted Trial Balance: A new trial balance after adjustments.
7. Prepare Financial Statements: Create the Income Statement and Balance Sheet.
8. Prepare Closing Entries: "Reset" temporary accounts.
9. Prepare Post-Closing Trial Balance: Final check.
• Identifying and analyzing business transactions.
• Recording transactions in a journal (journal entries).
• Posting journal entries to the ledger (individual accounts).
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Accounting Basic Notes
• Preparing a trial balance (a list of all accounts and their balances).
• Making adjusting entries (to update accounts for accruals, deferrals, etc.).
• Preparing an adjusted trial balance.
• Preparing the financial statements.
• Closing temporary accounts (revenue, expense, and drawing accounts).
• Preparing a post-closing trial balance.
Basic Accounting Concepts and Principles:
1. Business Entity Concept: Understanding that a business is separate from its owners.
2. Money Measurement Concept: Recording only transactions that can be expressed in
monetary terms.
3. Going Concern Concept: Assuming the business will continue to operate indefinitely.
4. Accounting Period Concept: Dividing the life of a business into specific time periods
for reporting.
5. Cost Concept (Historical Cost): Recording assets at their original purchase price.
6. Dual Aspect Concept (Duality): Recognizing that every business transaction has two
effects (e.g., an increase in one asset and a decrease in another, or an increase in an
asset and an increase in a liability or equity). This is the basis of the accounting
equation: Assets = Liabilities + Equity.
7. Revenue Recognition Concept (Realization Concept): Recording revenue when it is
earned, not necessarily when cash is received.
8. Matching Principle: Matching expenses with the revenues they helped to generate in
the same accounting period.
9. Full Disclosure Concept: Presenting all relevant information in the financial
statements.
10. Consistency Concept: Using the same accounting methods from period to period.
11. Conservatism Concept: When in doubt, recognizing expenses and liabilities sooner
and revenues and assets only when certain.
12. Objectivity Concept: Basing accounting records on verifiable evidence.
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