Accounting Basics Lecture Notes

Introduction

• Focus on the basic concepts of accounting.
• Target audience: Science students from non-commerce backgrounds.
• Objectives: Understand what accounting is, its processes, and fundamental terms like debit and credit.

What is Accounting?

• Definition: Accounting involves recording, classifying, and summarizing financial transactions to create meaningful financial information.
• Purpose: To provide decision-making data for users such as:
  • Management
  • Shareholders/Owners
  • Government
  • Creditors
• Main Financial Statements:
  • Balance Sheet: Shows financial position (assets, liabilities, equity).
  • Profit and Loss Account: Shows financial performance (profitability).

The Accounting Process

1. Source Document: Evidence of transactions (e.g., invoices, bills).
2. Journal Entry: Record of transactions.
3. Ledger Accounts: Posting journal entries to specific accounts.
4. Trial Balance: Summary of all ledger accounts' balances.
5. Financial Statements: Prepare final statements (Balance Sheet, Profit and Loss, Cash Flow, Changes in Equity).

Bookkeeping

• Definition: The process from source document to trial balance.
• Generally performed by accountants.

Elements of Financial Statements

• Only five key elements in accounting:
  1. Assets: Resources controlled by an entity.
  2. Liabilities: Present obligations to transfer economic resources.
  3. Equity (Capital): Money invested by owners.
  4. Revenue (Income): Gross inflow of cash.
  5. Expenses: Costs incurred to generate revenue.

Definitions of Elements

• Assets: Controlled resources expected to provide future economic benefits.
• Expenses: Costs incurred from which no further benefit is expected.
• Liabilities: Obligations to transfer economic resources as a result of past events.
• Equity: Claim of owners on total assets after liabilities are deducted.
• Revenue: Income generated from sales or services.

Example of a Sole Proprietorship

• Starting Capital: 1 lakh.
• Assets & Liabilities:
  1. Cash increases/decreases with transactions (e.g., machinery purchase).
  2. Loans create obligations (liabilities) and increase cash (assets).

Double-Entry Accounting

• Principle: Every transaction affects at least two accounts (debit and credit).
• Debits and Credits: Two-sided nature of transactions where:
  • Debit increases assets and expenses.
  • Credit increases liabilities, equity, and revenue.

Balances of the Elements

• Debits: Assets and expenses always have a debit balance.
  • To increase: Debit the account.
  • To decrease: Credit the account.
• Credits: Liabilities, equity, and revenue always have a credit balance.
  • To increase: Credit the account.
  • To decrease: Debit the account.

Conclusion

• Recap of key accounting concepts and the importance of each element.
• Future videos will cover journal entries and deeper accounting concepts.