Lecture Notes: Accounting Basics

Key Concepts of Accounting

Definition and Assumptions

• Accounting: Recording, classifying, and summarizing business transactions measurable in monetary terms.
• Business Continuity Assumption: Assumes that the business will continue to operate indefinitely.

Purpose and Periodicity

• Purpose of Accounting: To calculate profit and loss over specific periods (usually 12 months).
• Accounting Period Principle: The financial year usually runs from April 1 to March 31.

Fundamental Activities in Accounting

1. Recording: Transactions are recorded in books (Journal) on a daily basis.
2. Classifying: Grouping all transactions of one nature at one place in Ledger accounts.
3. Summarizing: Preparing financial statements (Income Statement, Balance Sheet, etc.) at regular intervals.

Books and Statements

• Journal: First book of entry where transactions are recorded chronologically.
• Ledger: Book where all entries from journals are classified and summarized under separate heads.
• Financial Statements: Summarized reports such as the Income Statement and Balance Sheet.

Practical Accounting Example: Starting a Business

Business Type and Ownership

• Example Business: Ghoda Chips (Manufacturing chips)
• Ownership: Sole Proprietorship by Sameer

Initial Capital and Loans

• Capital Requirement: ₹10 lakh
  • Owner’s Contribution: ₹8 lakh
  • Bank Loan: ₹2 lakh

Accounting Entries for Initial Transactions

1. Owner’s Capital Contribution: Debit Cash ₹8 lakh, Credit Capital ₹8 lakh
2. Bank Loan: Debit Cash ₹2 lakh, Credit Bank Loan ₹2 lakh

Acquiring Assets and Incurring Expenses

1. Rent Agreement: Recognize rent expense when paid.
2. Hiring Staff: Record salaries and wages when paid.
3. Purchasing Machinery: Debit Machinery, Credit Cash
4. Buying Furniture: Debit Furniture, Credit Cash
5. Purchasing Raw Materials (Potatoes): Debit Purchases, Credit Cash

Selling Goods

1. Selling Chips on Credit: Debit Accounts Receivable (Customer Name), Credit Sales

Understanding Double Entry Principle

• Every transaction affects at least two accounts: one account debited and another credited.
• Examples: Cash (Dr.), Capital (Cr.); Purchases (Dr.), Cash (Cr.); Sales (Cr.), Accounts Receivable (Dr.)

Important Considerations

• Separate Legal Entity: Business is considered separate from its owner for accounting purposes.
• Matching Principle: Expenses are matched with the revenues of the period in which they help generate.

Summary

• Main Idea: Accounting involves recording, classifying, and summarizing all measurable business transactions in monetary terms to determine the financial position and performance of a business.
• Key Process: Ensure every transaction is recorded in the journal, classified in the ledger, and summarized in financial statements.