Understanding Book keeping and accounting
Bookkeeping is considered a part of accounting. Accounting is a broader concept that
includes: 1. Recording (Bookkeeping) 2. Classifying (Bookkeeping) 3. Summarizing
4. Analyzing 5. Interpreting 6. Communicating financial information.
So:
> All bookkeeping is accounting, but not all accounting is just bookkeeping.
In short:
Bookkeeping is the initial stage.
Accounting = Bookkeeping + Decision-making tools (analysis, reports, interpretation).
Thus, in formal definitions, accounting includes bookkeeping, but goes far beyond it.
Remember since accounting is based on analysis so here comes various principles based
on which accounts are analyzed. For example let's say a stock to be analysed one would
analyse stock purely based on transaction principles and profit loss statement but same
can be analysed on different principles like motivation of entrepreneur and his personal
ability this we see there are various accounting principles
Accounting is not just about recording data — it's about analyzing and interpreting
financial information using certain principles. These principles ensure accuracy,
consistency, and a true picture of a business. Here are three key principles explained with
simple examples:
1. Conservatism Principle (Be Cautious)
> When choosing between two values, always record the lower value to avoid overstating
profits.
Example:
If rice stock was bought for ₹500 but its market value is now ₹450, we show ₹450 in the
books — not ₹500 — because the value has dropped.
2. Matching Principle (Match Income & Expense)
> Record expenses in the same period in which the related income is earned.
Example:
If ₹1,00,000 was spent on ads in February but it helped sell ACs worth ₹5,00,000 in
March, then record the ad expense in March, not February — so profit is correctly shown.
3. Accrual Principle (Don’t Wait for Cash)
> Record income or expense when it is earned or incurred, even if cash hasn’t been
received or paid yet.
Example:
If a project is completed in August but the client pays in September, the ₹10,000 income
should still be recorded in August.
Accounting concepts
These are basic assumptions, rules and principles which work as the basis of recording
business transactions and preparing accounts.
Main core are
1. Business entity concept- it says that always treat company and owner different and
separate entities and never consider them one so if owner takes money from
company it should be shown as decrease of assets of company and reduction in
capital part of owner. In accounts it is technically called as “Drawings” and never
considered as expense of company.
2. Money measurement concept: it states that everything in accounts, even if it is
machinery or any physical goods, always has to be converted into monetary terms so
aspects like motivation of employees are never recorded in accounts rather salary of
employees are recorded.
3. Going concern concept: The Going Concern Concept assumes that the business
will continue to operate for the foreseeable future — not shutting down soon. The
Going Concern Concept allows you to spread the cost of long-term assets like
machinery over their useful life (through depreciation), even though cash is reduced
immediately. This reflects the idea that the business will continue using the
machinery for several years, not just the year it was bought.
4. Dual aspect concept: this concept states that every transaction has two effects and
it affects accounts at two different places. Something is received, and something is
given in return. This is the basic idea behind the double-entry system of accounting.
For example, if a business buys a machine by paying cash, the machine comes into
the business (an asset increases), and cash goes out (another asset decreases).
Similarly, when the owner invests money into the business, the business receives
cash (asset increases), and the owner’s claim on the business (capital) also
increases.
Because of this concept, accountants use a special rule called the Accounting
Equation:
{Assets} = {Liabilities} + {Capital}
This equation must always stay balanced. If one side increases, the other side must
also increase, or something else on the same side must decrease to keep the
balance. That’s why every accounting entry is made in two places — a debit and a
credit — so nothing is missed, and the books remain accurate.
In short, the Dual Aspect Concept ensures that every transaction is recorded in a
way that reflects the true financial position of the business. It helps keep everything
fair, complete, and transparent.
Accounting Conventions
1. Convention of consistency
It means the same accounting principles should be used for preparing financial
accounts year after year.
2. Convention of materiality
Convention of Materiality means that only important items which can influence
decisions of users should be recorded in detail in accounting. Small or insignificant
items (like pens, staplers) can be treated as expenses instead of assets, even if
technically they are. This helps keep accounts simple, relevant, and focused on what
truly matters.
3. Convention of conservatism
The Convention of Conservatism says to play safe in accounting. It advises that all
expected losses should be recorded, but gains should be ignored until they actually
happen. This prevents overstatement of profits and shows a cautious financial
position.
Accounting terminology
1. Capital: it is amount invested by owner or also called as owner equity
2. Drawings- it is the money or goods drawn by proprietors from business for personal
use.
3. Asset- In accounting, an asset is anything that a business controls which can be
valued in terms of money and can use to get future benefits, even if it doesn't fully
own it. This means that ownership is not always necessary—as long as the business
has control over the resource and can expect it to help in the future, it is considered
an asset.
An asset must come from a past event, such as buying something, taking something
on lease, or receiving it in some other way. What makes it truly an asset is the fact
that it will bring future benefits—for example, by helping the business earn income,
save costs, or run its operations smoothly.
So, in simple terms, always remember:
> Asset = Control + Future Benefit
Types of assets
Fixed assets- the assets which are acquired not for resale but with a purpose to
increase the earning capacity of the business by employing them for example land,
building, machinery etc.
Current assets- assets which are retained in the business with the purpose to convert
them into cash within short period of time save one year for example cash in hand,
goods stock etc
Tangible assets
Intangible assets- goodwill, trademark, patents.
Wasting Assets- those assets which are natural resources extracted and consumed
as raw material or otherwise for example mines, oil Wells etc
4. Liabilities - liabilities are obligation or debt payable by business unit in future so any
amount which firm owes to the proprietors and outsider is a liability for business unit
because the asset of business is financed by fund supplied by proprietors and
outsider so they both have a claim against the assets of the business this claim is
termed as liabilities.
A liability is a present obligation of the business arising from past events, the
settlement of which is expected to result in an outflow of resources (like cash or
services) from the business.
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In Simple Words:
⏳
Obligation = Something the business must pay or do
🕰️
Present obligation = It exists right now
Past event = It came from something that already happened (like a loan taken or
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goods purchased)
Future outflow = The business will have to pay money or give services in the
future.
5. Revenue- Revenue is the total amount of income earned by a business from its
normal activities, such as selling goods or providing services, before any expenses
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are deducted.
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In Simple Words:
🛍️
Revenue means the money a business earns by doing what it regularly does.
🛠️
If it sells products → revenue comes from product sales.
❌
If it provides services → revenue comes from service fees.
It is not profit – expenses haven’t been subtracted yet.
6. Expenses- it is the amount spent in order to produce and sell goods and services to
earn revenue.
Expenses are the costs a business incurs in order to earn revenue or run its daily
💡
operations.
💸
In Simple Words:
🔁
Expenses are the money spent to keep the business running.
❌
They are used up in the process of earning income.
Expenses reduce profit.
They are recorded when they happen, not just when paid (in accrual accounting).
7. Expenditure- expenditure is generally the amount spent for purchase of assets so it
increases the profit earning capacity of the business for example machine purchased
etc whereas expense is an amount spent to earn revenue and expenditure is always
considered as capital expenditure unless it is qualified with words like revenue
expenditure on rent, salary etc
8. Profit- it is excess of business revenue over business expenses. It increases the
owner equity.
9. Losses- it is excess of business expenses over business revenue. It leads to net
decrease in net assets so decreases the owner equity.
10.Purchases- The total cost of goods or materials bought by a business during a
period, mainly for resale or for production.
So it is purchases of such goods and services in which firm deals. Purchases =
Goods or raw materials bought for business use (resale or production only)
Not for assets, not for personal use, not for services.
11.Sales- it is the exchange of such goods and services for money in which firm deals
in.
12.Stock- Stock refers to the goods a business holds for the purpose of resale or for
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use in the production of goods to be sold
In Simple Words:
Stock is what a business has in hand at any given time to sell or use to produce
something to sell.
It is a current asset because it will be sold or used up soon (usually within a year).
13.Receivables- Receivables are amounts of money that a business is yet to receive
from customers or others, usually because it sold goods or services on credit.
14.Payables-Payables are amounts of money that a business owes to others, usually
💡
because it bought goods or services on credit
In Simple Words:
When your business buys something on credit (i.e., you will pay later),
→ the amount you owe is called a payable.
It is a liability, because the business has to pay it in the future (usually within a year).
15.Debtors and creditors- A debtor is a person who owes money and a creditor is a
person to whom money is owed so a person becomes a debtor when he receives
some benefits, it may be in the form of money, goods or services and a person
becomes a creditor when he gives some benefits.
16.Debit and Credit- every business transaction involves a debit and a credit and debit
amount should be equal to credit amount this practice of having equal debit and
credits is called double entry bookkeeping.
In accounting, debit (Dr) and credit (Cr) are the two fundamental sides of every
financial transaction. They are used to record how different accounts are affected
when a business activity takes place. Simply put, debit means what comes into the
business, and credit means what goes out. However, this is just a basic
shortcut—understanding how debits and credits actually work depends on the type of
account involved.
For example, in the case of assets and expenses, an increase is recorded as a debit,
while a decrease is recorded as a credit. On the other hand, for liabilities, income,
and capital, an increase is recorded as a credit, and a decrease is recorded as a
debit.
Every transaction in accounting must have both a debit and a credit entry. This is
called the double-entry system, and it ensures that the accounting equation stays
balanced—total debits always equal total credits.
To understand this better, take some simple examples:
a. If you buy furniture for cash, you debit furniture (because an asset increases)
and credit cash (because another asset decreases).
b. If you take a loan from the bank, you debit cash (cash increases) and credit
bank loan (a liability increases).
c. If you pay salary, you debit salary (expense increases) and credit cash (asset
decreases).
It's important to remember that debit is not always a gain, and credit is not
always a loss—their meaning changes depending on the account being
affected.
In short, debit and credit are recording tools, and together they help keep the
books accurate, balanced, and clear. A simple way to remember is:
> Assets and Expenses → Increase = Debit
Liabilities, Income, and Capital → Increase = Credit
This understanding forms the foundation of all financial accounting.
lets understand this debit and credit more better because it is one of the most confusing
items in a journal entry.
Etymologically in old merchant understanding debit was when someone owes money to you
and credit means when you owe something to others. In the balance sheet each side of the
account has both a credit and debit side wheras debit is on the left side wheras debit is on
the right side. Here debit means some value comes into you or you are gaining something
whereas credit means which something is going out or you losing out some value.
let say you are on the asset side only focus like if something is increasing asset then it is
debit side and if decreasing then it is credit side and when we go to liability side if something
is increasing liability means credit side is increased and if liability is getting decreased then it
is debit side. now when you do journal entry focus on each term and see practically and
write your main observations.
Please note:
In accounting, a business is a separate person from its owner. Whatever the business has
— cash, buildings, stock — is not truly “owned” by the business itself. Every asset belongs to
someone: either outsiders (creditors, suppliers, banks) or the owners (shareholders,
proprietor). That’s why the accounting equation says: Assets = Liabilities + Owner’s Equity. If
the business were closed, it would sell its assets, pay the outsiders first, and give what’s left
to the owners. After that, the business itself would have nothing. In truth, the business
neither owns nor owes anything; it only holds resources on behalf of others.
Remember in any transaction if cash payment is not given and name of seller is given then it
is a credit transaction means udhar pe li hui transaction.
