Basics of Accounting (Most Important)

Meaning of Accounting
Accounting is the process of recording, classifying and summarizing financial transactions of a business.

Objectives of Accounting

• To keep a record of all transactions
• To know profit or loss
• To know financial position (assets & liabilities)
• To help in decision making

Simple Idea:
Accounting = “Language of Business”

Basic Accounting Terms

👉 Assets

• What business owns
• Example: Cash, building, machinery

👉 Liabilities

• What business owes
• Example: Loan, creditors

👉 Capital

• Owner’s investment in business
• Example: Money invested by owner

👉 Revenue

• Income earned from business
• Example: Sales, fees

👉 Expenses

• Money spent to run business
• Example: Rent, salary

✅ Easy Trick:

• Assets = Own
• Liabilities = Owe
• Capital = Owner’s money
• Revenue = Income
• Expenses = Spending

🔹 Accounting Equation

Assets = Liabilities + Capital

👉 This is the base of accounting

👉 It means:

• Whatever the business owns =
  Money from outsiders + Owner’s money

👉 Example:
If Assets = ₹50,000 and Liabilities = ₹20,000
Then Capital = ₹30,000

✅ Golden Rule:
Equation must always be balanced ⚖️

🔹 Introduction to Double Entry System

👉 Every transaction has two effects

👉 One account is Debited (Dr)
👉 Another account is Credited (Cr)

📌 Example:
Bought furniture for cash

• Furniture (Asset) ↑ → Debit
• Cash ↓ → Credit

✅ Simple Rule:
“Every Debit has a Credit”

🔹 Journal, Ledger & Trial Balance (Basic Idea)

👉 Journal 📘

• First step of recording transactions
• Called Book of Original Entry

👉 Ledger 📗

• Second step
• Classifies transactions into different accounts

👉 Trial Balance 📊

• Third step
• Checks whether Debit = Credit

✅ Flow:
Journal → Ledger → Trial Balance