📖 ACCOUNTING – SUMMARY NOTES
🧠 1. Meaning & Definition
Accounting is the process of recording, classifying, summarizing, analyzing, and interpreting financial transactions to know the profit/loss and financial position of a business.
Definition (AICPA):
“Accounting is the art of recording, classifying, and summarizing in a significant manner the transactions and events which are of a financial character.”
💰 2. Objectives of Accounting
- To maintain systematic records of transactions.
- To ascertain profit or loss during a period.
- To know financial position (Assets, Liabilities, Capital).
- To provide information for decision making.
- To ensure compliance and control.
🧾 3. Basic Terms
| Term | Meaning |
|---|---|
| Transaction | Any exchange involving money. |
| Asset | Resources owned (Cash, Machinery). |
| Liability | Amount owed to others. |
| Capital | Owner’s investment in business. |
| Expense | Cost incurred to earn income. |
| Income | Revenue earned. |
| Drawings | Amount withdrawn by owner. |
🧩 4. Branches of Accounting
| Type | Purpose |
|---|---|
| Financial Accounting | Records and summarizes transactions. |
| Cost Accounting | Calculates cost of production. |
| Management Accounting | Provides data for internal decision-making. |
| Tax Accounting | Deals with taxation rules and returns. |
| Forensic Accounting | Detects fraud and irregularities. |
⚖️ 5. Accounting Equation
Assets = Liabilities + Capital
Example:
If owner invests ₹50,000 →
Assets = ₹50,000 (Cash)
Liabilities = ₹0
Capital = ₹50,000
📚 6. Accounting Principles & Concepts
| Concept | Description |
|---|---|
| Business Entity | Business and owner are separate. |
| Money Measurement | Only measurable in money recorded. |
| Going Concern | Business will continue in future. |
| Accounting Period | Fixed time (usually 1 year) for reporting. |
| Cost Concept | Assets recorded at purchase cost. |
| Dual Aspect | Every transaction affects two accounts. |
| Matching Concept | Match expenses with related income. |
| Accrual Concept | Record revenues/expenses when incurred, not when cash is received. |
| Conservatism | Record expected losses, not expected gains. |
🧾 7. Rules of Debit and Credit
| Account Type | Debit (Dr.) | Credit (Cr.) |
|---|---|---|
| Assets | Increase | Decrease |
| Liabilities | Decrease | Increase |
| Capital | Decrease | Increase |
| Expenses/Losses | Increase | Decrease |
| Incomes/Gains | Decrease | Increase |
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 all expenses & losses, Credit all incomes & gains.
📒 8. Stages of Accounting Process
- Identifying financial transactions
- Recording (in Journal)
- Classifying (in Ledger)
- Summarizing (Trial Balance, Final Accounts)
- Analyzing results
- Interpreting financial information
- Communicating to users
📘 9. Accounting Books
| Book | Purpose |
|---|---|
| Journal | Day-to-day recording of transactions. |
| Ledger | Classifies transactions under each account. |
| Trial Balance | Checks arithmetical accuracy. |
| Cash Book | All cash & bank transactions. |
| Final Accounts | Trading A/c, P&L A/c, Balance Sheet. |
📊 10. Financial Statements
1. Trading Account
- Shows Gross Profit or Loss
Gross Profit = Sales – (Opening Stock + Purchases + Direct Expenses)
2. Profit & Loss Account
- Shows Net Profit or Loss
Net Profit = Gross Profit – Indirect Expenses + Indirect Incomes
3. Balance Sheet
- Shows financial position at year-end.
Assets = Liabilities + Capital
📈 11. Depreciation
Reduction in the value of assets due to wear and tear or obsolescence.
Methods:
- Straight Line Method (SLM)
- Diminishing Balance Method (DBM)
- Units of Production Method
💳 12. Errors in Accounting
| Type | Meaning |
|---|---|
| Error of Omission | Transaction not recorded. |
| Error of Commission | Wrong amount or account. |
| Error of Principle | Violation of accounting principle. |
| Compensating Error | One error cancels another. |
📅 13. Trial Balance
A list of all ledger balances to check mathematical accuracy of books.
✅ Debit = Credit → Books are arithmetically correct (but not always error-free).
🧮 14. Adjustment Entries (Examples)
| Adjustment | Journal Entry |
|---|---|
| Outstanding Expenses | Dr. Expense / Cr. Outstanding Exp. |
| Prepaid Expense | Dr. Prepaid Exp. / Cr. Expense |
| Accrued Income | Dr. Accrued Income / Cr. Income |
| Depreciation | Dr. Depreciation / Cr. Asset |
🧾 15. Users of Accounting Information
- Internal Users: Management, employees, owners.
- External Users: Investors, creditors, banks, government, public.
📘 16. Difference Between Bookkeeping & Accounting
| Basis | Bookkeeping | Accounting |
|---|---|---|
| Scope | Recording only | Recording + Analysis |
| Level | Clerical | Analytical |
| Objective | Maintain records | Determine results & position |
| Stage | First stage | Next stage |
🧠 17. Basic Accounting Formula
- Capital = Assets – Liabilities
- Gross Profit = Sales – Cost of Goods Sold
- Net Profit = Gross Profit – Indirect Expenses + Incomes
📚 18. Final Accounts Format (Short)
Trading Account → P&L Account → Balance Sheet
Trading A/c → shows Gross Profit/Loss
Profit & Loss A/c → shows Net Profit/Loss
Balance Sheet → shows Assets = Liabilities + Capital
🏁 19. Key Concepts Recap
| Topic | Formula/Meaning |
|---|---|
| Dual Aspect | Every debit has a credit |
| Matching Concept | Expenses linked with related revenues |
| Conservatism | Anticipate no profits but provide for losses |
| Consistency | Same accounting methods used every year |
| Accrual Basis | Record even if not received/paid |
📋 20. Summary
✅ Accounting = Systematic record of financial transactions.
✅ Objective = Know profit/loss & financial position.
✅ Process = Journal → Ledger → Trial Balance → Final Accounts.
✅ Equation = Assets = Liabilities + Capital.
✅ Tools = Books, Statements, Adjustments, Principles.