📘 1. Introduction to Accountancy

Accounting is the process of recording, classifying, summarising, and interpreting financial transactions.
It helps to know how money is coming in (income) and going out (expenses).

Definition:
Accounting is the language of business — it tells the financial story of an organization.

Objectives of Accounting

• To record all business transactions systematically
• To find out the profit or loss during a specific period
• To know the financial position (assets, liabilities, and capital)
• To help in decision-making
• To provide information to stakeholders (owners, banks, government)

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📂 2. Accounting Process

Accounting is done step-by-step. Let’s understand this flow:

Step	Stage	Description
1	Identifying Transactions	Recognize financial events (only those that can be measured in money).
2	Recording (Journalizing)	Record the transactions in the Journal in chronological order.
3	Posting to Ledger	Transfer entries from Journal to Ledger accounts.
4	Preparing Trial Balance	Check the arithmetic accuracy of ledger balances.
5	Preparing Final Accounts	Prepare Trading, Profit & Loss Account and Balance Sheet.

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📖 3. Basic Terms and Concepts

Term	Meaning	Example
Transaction	Any event that changes financial position	Purchase of goods for ₹5,000
Account	A record for each type of asset, liability, income, or expense	Cash Account, Sales Account
Assets	What the business owns	Cash, Buildings, Machinery
Liabilities	What the business owes	Loans, Creditors
Capital	Owner’s investment in the business	₹1,00,000 invested by owner
Income	Money earned	Sales revenue
Expense	Money spent to earn income	Rent, Salary
Drawings	Money withdrawn by owner for personal use	Owner takes ₹2,000 cash

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📜 4. Accounting Principles and Concepts

These are the rules that guide how accounting is done.

a) Business Entity Concept

Business and owner are separate entities.
➡️ Example: If the owner takes ₹5,000 cash for personal use, it is recorded as Drawings, not business expense.

b) Money Measurement Concept

Only transactions measurable in money terms are recorded.
➡️ Employee skill or brand reputation is not recorded.

c) Going Concern Concept

The business is expected to continue in the future.
➡️ Assets are not recorded at resale value but at cost.

d) Accounting Period Concept

Business life is divided into equal periods (usually 1 year) to measure results.

e) Cost Concept

Assets are recorded at their original cost, not current market value.

f) Dual Aspect Concept

Every transaction has two effects – Debit and Credit.
➡️ Example: Purchase goods for cash – Goods come in (Debit), Cash goes out (Credit).

g) Matching Concept

Expenses should be matched with revenues of the same period.

h) Realization Concept

Revenue is recognized when goods or services are sold, not when cash is received.

i) Accrual Concept

Record income and expenses when they occur, not when cash changes hands.

j) Conservatism (Prudence)

Record expected losses but not expected profits.

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🧮 5. Double Entry System

This is the foundation of modern accounting.

Rule:

Every transaction has two aspects:
Debit (Dr) – Receiving benefit
Credit (Cr) – Giving benefit

Example:

Bought furniture for ₹10,000 in cash
→ Furniture A/c Dr ₹10,000
→ To Cash A/c ₹10,000

Both sides (Dr = Cr) are always equal.

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📘 6. Books of Accounts

Stage	Book	Purpose
1	Journal	Primary book where transactions are first recorded
2	Ledger	Contains all accounts (Cash, Sales, Purchases, etc.)
3	Trial Balance	Checks the correctness of ledger balances
4	Final Accounts	Shows financial performance and position

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✍️ 7. Journal Entries

Format:

Date	Particulars	L.F.	Debit (₹)	Credit (₹)

Example:

Paid rent ₹5,000 by cash

Rent A/c Dr ₹5,000
To Cash A/c ₹5,000
(Being rent paid)

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📗 8. Ledger

A Ledger is a collection of all accounts.
Each account has two sides: Debit and Credit.

Example (Cash Account)

Debit Side		Credit Side
Date	Particulars	Date	Particulars
Jan 1	Capital ₹50,000	Jan 3	Purchase ₹10,000

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📊 9. Trial Balance

• It is a list of all ledger balances (both debit and credit).
• It ensures the arithmetic accuracy of books.
• Total of Debit side = Total of Credit side.

Example:

Account	Dr (₹)	Cr (₹)
Cash	40,000
Purchases	10,000
Sales		50,000
Total	50,000	50,000

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💼 10. Final Accounts

(a) Trading Account

Shows Gross Profit or Gross Loss

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

(b) Profit & Loss Account

Shows Net Profit or Net Loss

Net Profit = Gross Profit – Indirect Expenses + Indirect Income

(c) Balance Sheet

Shows the financial position of the business.
It lists Assets, Liabilities, and Capital.

Liabilities	Amount (₹)	Assets	Amount (₹)
Capital	50,000	Cash	10,000
Creditors	5,000	Machinery	45,000
Total	55,000	Total	55,000

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💡 11. Adjustment Entries

Made at the end of the year for items not yet recorded.

Item	Type	Example
Outstanding Expense	Expense not yet paid	Salary outstanding ₹2,000
Prepaid Expense	Expense paid in advance	Rent paid for next year ₹3,000
Accrued Income	Income earned but not received	Interest due ₹500
Depreciation	Decrease in asset value	Machinery depreciation 10%

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📋 12. Common Financial Statements

Statement	Purpose
Trading Account	To find Gross Profit
Profit & Loss Account	To find Net Profit
Balance Sheet	To show Financial Position

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🧠 13. Real-Life Example

Imagine you start a small stationery shop.

Transaction	Effect
Invest ₹1,00,000	Cash A/c Dr, Capital A/c Cr
Purchase goods ₹40,000	Purchases A/c Dr, Cash A/c Cr
Sell goods ₹60,000	Cash A/c Dr, Sales A/c Cr
Pay rent ₹5,000	Rent A/c Dr, Cash A/c Cr

At the end of the month, you prepare:

• Trading A/c → to find profit
• Balance Sheet → to see assets and liabilities

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🧾 14. Errors in Accounting

Type of Error	Meaning	Example
Error of Omission	Transaction not recorded	Missed entry for purchase
Error of Commission	Wrong account used	Rent paid entered in salary account
Error of Principle	Violating accounting rule	Treating capital expense as revenue
Compensating Error	Two errors cancel each other	Over debit of ₹500 and over credit of ₹500

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🔧 15. Rectification of Errors

• Use Journal Entries to correct mistakes.
• If error found after Trial Balance → Suspense Account is used.

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🧩 16. Depreciation

Meaning: Reduction in the value of an asset over time due to use or wear and tear.

Method	Formula	Example
Straight Line Method	Cost – Scrap Value / Life	₹50,000 asset, 10 years → ₹5,000 per year
Reducing Balance Method	Depreciation on Book Value	10% each year on remaining value

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🧮 17. Provision and Reserves

Term	Meaning	Purpose
Provision	Amount kept aside for known liability	Provision for Bad Debts
Reserve	Amount kept from profit for future use	General Reserve

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📚 18. Capital & Revenue Items

Type	Meaning	Example
Capital Expenditure	Long-term benefit	Purchase of Machinery
Revenue Expenditure	Short-term benefit	Repairs, Rent
Capital Receipt	Money from owner or loan	Owner’s investment
Revenue Receipt	Money from operations	Sale income

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🏁 Summary

Concept	Key Idea
Accounting	Systematic record of transactions
Double Entry	Every transaction has Debit & Credit
Ledger	Collection of all accounts
Trial Balance	Check accuracy of accounts
Final Accounts	Determine profit & financial position
Depreciation	Decrease in asset value
Provision	Liability for expected expense

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⚡ Quick Revision Points (For Exam)

• Accounting = Recording + Classifying + Summarizing + Interpreting
• Golden Rules:
  • Personal A/c → Debit the receiver, Credit the giver
  • Real A/c → Debit what comes in, Credit what goes out
  • Nominal A/c → Debit expenses/losses, Credit incomes/gains
• Trial Balance = Debit total = Credit total
• Trading A/c → Gross Profit
• P&L A/c → Net Profit
• Balance Sheet → Assets = Liabilities + Capital
• Depreciation → Non-cash expense
• Provision vs Reserve → Provision = Expense, Reserve = Appropriation of Profit

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