📒 BUSINESS ACCOUNTING – SUMMARY NOTES

🧠 1. Meaning and Definition

Accounting is the process of recording, classifying, summarizing, and interpreting financial transactions to know the financial position of a business.

Definition (AICPA):
“Accounting is the art of recording, classifying, and summarizing transactions in terms of money and interpreting the results thereof.”

🎯 2. Objectives of Accounting

To maintain systematic records of business transactions.
To determine profit or loss.
To ascertain financial position.
To provide information for decision-making.
To assist in controlling assets and liabilities.

🧾 3. Basic Terms

Term	Meaning
Transaction	Any business activity involving money.
Assets	Properties owned (e.g., Cash, Furniture).
Liabilities	Amounts owed (e.g., Creditors, Loans).
Capital	Owner’s investment in business.
Drawings	Money/goods taken by owner for personal use.
Revenue	Income earned from business.
Expense	Cost incurred to earn revenue.
Debtors	Customers who owe money.
Creditors	Persons to whom business owes money.

⚖️ 4. Accounting Equation

Assets=Liabilities+CapitalAssets=Liabilities+Capital

👉 Always remains balanced after every transaction.

Example:
Owner invests ₹10,000 →
Assets (Cash) = ₹10,000
Capital = ₹10,000

📚 5. Branches of Accounting

Branch	Description
Financial Accounting	Recording & reporting transactions.
Cost Accounting	Controlling and reducing production cost.
Management Accounting	Helps in decision-making and planning.
Tax Accounting	Related to tax returns and compliance.

📋 6. Steps in Accounting Process

Identifying transactions
Recording in Journal (Book of Original Entry)
Posting to Ledger accounts
Preparing Trial Balance
Preparing Final Accounts – Trading, P&L, Balance Sheet

🪶 7. Accounting Principles

A. Accounting Concepts (Fundamentals)

Concept	Explanation
Business Entity	Business ≠ Owner
Money Measurement	Only monetary transactions recorded
Going Concern	Business will continue
Cost Concept	Assets recorded at cost price
Dual Aspect	Every transaction has two effects
Accounting Period	Fixed period (usually 1 year)
Matching Concept	Match revenues with expenses
Accrual Concept	Record income/expenses when due, not when received/paid

B. Accounting Conventions

Convention	Meaning
Conservatism	Anticipate losses, not profits
Consistency	Same methods used every year
Materiality	Record only important items
Full Disclosure	Show all relevant information

🧾 8. Types of Accounts

Type	Rule of Debit and Credit
Personal	Debit the receiver, Credit the giver
Real	Debit what comes in, Credit what goes out
Nominal	Debit all expenses & losses, Credit all incomes & gains

🧮 9. Journal Entries (Golden Rules)

Type	Example
Personal	Cash paid to Ram → Ram’s A/c Dr. To Cash A/c
Real	Bought Furniture → Furniture A/c Dr. To Cash A/c
Nominal	Paid Rent → Rent A/c Dr. To Cash A/c

📘 10. Ledger

Collection of all accounts in summarized form.
Each transaction is posted from Journal → Ledger.

📊 11. Trial Balance

A list of all ledger balances to check arithmetical accuracy.

Total of debit side = Total of credit side

🧾 12. Financial Statements

A. Trading Account

→ Calculates Gross Profit / LossGross Profit=Sales−(Opening Stock+Purchases+Direct Expenses−Closing Stock)Gross Profit=Sales−(Opening Stock+Purchases+Direct Expenses−Closing Stock)

B. Profit & Loss Account

→ Shows Net Profit / LossNet Profit=Gross Profit+Other Income−Indirect ExpensesNet Profit=Gross Profit+Other Income−Indirect Expenses

C. Balance Sheet

→ Shows Financial Position (Assets = Liabilities + Capital)

💰 13. Depreciation

Reduction in the value of fixed assets due to use or time.

Methods:

Straight Line Method
Diminishing Balance Method

Depreciation=Cost−Scrap ValueLife of AssetDepreciation=Life of AssetCost−Scrap Value

📦 14. Inventory (Stock Valuation)

Methods:

FIFO – First In, First Out
LIFO – Last In, First Out
Weighted Average Cost

📈 15. Errors and Their Rectification

Error Type	Example	Correction
Error of Omission	Entry not recorded	Record missing entry
Error of Commission	Wrong posting	Correct posting
Error of Principle	Violates accounting rule	Rectify by correct classification
Compensating Errors	One error cancels another	Identify and adjust both

💹 16. Bank Reconciliation Statement (BRS)

Used to reconcile difference between:

Cash Book balance and
Bank Statement (Pass Book) balance.

Reasons for difference:

Cheques not cleared
Bank charges
Interest credited
Errors in entries

📉 17. Capital & Revenue

Basis	Capital	Revenue
Nature	Long-term	Short-term
Example	Machinery, Building	Rent, Salary
Benefit	Future	Current period

🧾 18. Final Accounts Format

Trading Account → Profit & Loss A/c → Balance Sheet

Liabilities	Assets
Capital	Fixed Assets
Creditors	Current Assets
Loans	Cash/Bank
Outstanding Exp.	Debtors
—	Closing Stock

📊 19. Adjustments in Final Accounts

Outstanding expenses
Prepaid expenses
Accrued income
Depreciation
Bad debts
Provision for doubtful debts

📋 20. Key Accounting Ratios

Ratio	Formula	Meaning
Current Ratio	Current Assets / Current Liabilities	Liquidity
Debt-Equity Ratio	Debt / Equity	Solvency
Gross Profit Ratio	(Gross Profit / Sales) × 100	Efficiency
Net Profit Ratio	(Net Profit / Sales) × 100	Profitability
Return on Investment	(Net Profit / Capital) × 100	Performance

✅ 21. Importance of Accounting

Keeps systematic records
Determines profit or loss
Assesses financial position
Assists in decision-making
Legal compliance
Controls costs and resources

🧾 22. Limitations of Accounting

Based on historical data
Ignores non-monetary factors
Use of estimates
Different methods reduce comparability

💼 23. Users of Accounting Information

Internal	External
Management	Investors
Employees	Creditors
Owners	Government
—	Banks

🧩 24. Accounting Cycle (Summary)

Identify transactions
Record in Journal
Post to Ledger
Prepare Trial Balance
Adjustments
Prepare Final Accounts
Analyze & interpret results

🧾 25. Summary Chart

Step	Book	Purpose
1	Journal	Record transactions
2	Ledger	Classify accounts
3	Trial Balance	Check accuracy
4	Final Accounts	Determine results

Business accounting