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What is Accounting ?
Accounting is the process of recording financial transactions pertaining to a business. The accounting
process includes summarizing, analysing and reporting these transactions to various stakeholders
such as shareholders, management, investors, government agencies, regulators and tax collection
entities.

Important terms in accounting

➔ Assets- An asset is a resource with economic value that an individual or corporation owns or
controls with the expectation that it will provide a future benefit. Eg- Land, machinery,
furniture, cash, bank balance, stock, etc.
➔ Liability- A liability is a financial obligation of a company that results in the company's future
sacrifices of economic benefits to other entities or businesses. Eg- Owner’s equity, creditors,
borrowings, etc
➔ General Ledger- A complete record of the financial transactions over the life of a company.
➔ Equity and owner's equity - In the most general sense, equity is assets minus liabilities. An
owner’s equity is typically explained in terms of the percentage of stock owned by a person in
the company. The owners of the stock are known as shareholders. Eg- If a person invests INR
50 lakhs in a business, then he is the owner and the owner’s equity is INR 50 lakhs.
➔ Fixed Assets- Amount invested in long term assets which is not intended to be sold within a
year. Eg. Machinery, Land, Computers,etc.
➔ Current Assets- Amount invested in short term assets which is intended and rotated to earn
revenue. Eg. Inventory, Debtors, etc
NOTE: The Fixed Asset and Current asset vary from person to person. Eg: For a car dealer, a car
is a current asset as it is an inventory which needs to be sold whereas a car becomes a fixed
asset for a tour agency as it will be using the car to earn the money.
➔ Creditors (Supplier)- Person who provides money or goods on credit to the business. Also
known as trade payables or accounts payables in accounting.
➔ Debtors (Customer)- Person to whom the goods are sold on credit by the business. Also
known as trade receivables or accounts receivable in accounting.
➔ Depreciation- Depreciation has been defined as the diminution in the utility or value of an
asset due to normal wear and tear. There are different methods of depreciation. The most
common ones being the straight line method and diminishing balance.
➔ Expenses- Amount incurred or expended to earn the revenue. The fixed, variable, accrued or
day-to-day costs that a business may incur through its operations.Eg - Rent, Salaries, etc
❖ Types of expenses (fixed, variable, accrued, operational)
1. Fixed expenses (FE): Fixed expenses or costs are those that do not fluctuate with changes in
production level or sales volume. They include such expenses as rent, insurance, dues and
 subscriptions, equipment leases, payments on loans, depreciation, management salaries, and
advertising.
2. Variable expenses (VE): Expenses, like labor costs, that may change in a given time period.
3. Accrued expense (AE): An incurred expense that hasn’t been paid yet.
4. Operational expenses (OE): Business expenditures not directly associated with the
production of goods or services—for example, advertising costs, property taxes or insurance
expenditures.

Accounting Concepts / Principles

1. Business Entity Concept - The business entity concept states that the transactions associated
with a business must be separately recorded from those of its owners or other businesses.
Doing so requires the use of separate accounting records for the organization that completely
exclude the assets and liabilities of any other entity or the owner. Without this concept, the
records of multiple entities would be intermingled, making it quite difficult to discern the
financial or taxable results of a single business. Eg -
● Mr. John has acquired a floor of a building having 3 halls for INR 1,500 per month. He
uses two halls for his business and one for personal purposes. According to the
business entity concept, only INR 1,000 (the rent of two halls) is a valid expense of the
business.
2. Money Measurement Concept - The money measurement concept states that a business
should only record an accounting transaction if it can be expressed in terms of money. This
means that the focus of accounting transactions is on quantitative information, rather than on
qualitative information. Examples of items that cannot be recorded as accounting transactions
because they cannot be expressed in terms of money include - Employee skill level, Employee
working conditions, The quality of customer support or field service, The efficiency of
administrative processes, etc.
3. Dual Aspect Concept- The dual aspect concept states that every business transaction requires
recordation in two different accounts. This concept is the basis of double entry accounting,
which is required by all accounting frameworks in order to produce reliable financial
statements. The concept is derived from the accounting equation, which states that:
Assets = Liabilities + Equity
4. Cost Concept- Under the cost concept of accounting, an asset should be recorded on its cost
in which it was purchased regardless of its market value e.g. If a building is purchased for INR
5,00,000, it will continue to appear in the books at that figure irrespective of its market value.
5. Accounting Period - Accounting measures activity for a specified interval of time, usually a
year; Calendar Year (Jan’21-Dec’21) or Fiscal Year (Apr’21-Mar’22). Choosing the accounting
period is the entities’ choice, but there are legal rules like Companies Act and Income Tax Act
which prescribes the period in which the entity has to report to them.
 6. Conservatism - The conservatism principle is the general concept of recognizing expenses and
liabilities as soon as possible when there is uncertainty about the outcome, but to only
recognize revenues and assets when they are assured of being received. Anticipate no profits
but provide for all possible losses.
7. Realization Concept- The realization principle is the concept that revenue can only be
recognized once the underlying goods or services associated with the revenue have been
delivered or rendered, respectively. Thus, revenue can only be recognized after it has been
earned. For eg - A customer pays INR 1,000 in advance for a custom-designed product. The
seller does not realize the INR 1,000 of revenue until its work on the product is complete and
shipped to the customer. Consequently, the INR 1,000 is initially recorded as a liability in the
business books, which is then shifted to revenue only after the product has shipped.
8. Matching Concept- The matching concept is an accounting practice whereby firms recognize
revenues and their related expenses in the same accounting period. Firms report "revenues,"
that is, along with the "expenses" that brought them. The purpose of the matching concept is
to avoid misstating earnings for a period. Reporting revenues for a period without stating all
the expenses that brought them could result in overstated profits.
9. Materiality Concept - Insignificant events would not be recorded, if the benefit of recording
them does not signify the cost. Eg: A calculator worth Rs.500 is not recorded as an asset,
rather it is charged off as an expense. The materiality concept varies based on the size of the
entity. A massive multi-national company may consider an INR 1 million transaction to be
immaterial in proportion to its total activity, but INR 1 million could exceed the revenues of a
small local firm, and so would be very material for that smaller company.
10. Objectivity - The objectivity principle is the concept that the financial statements of an
organization be based on solid evidence. The intent behind this principle is to keep the
management and the accounting department of an entity from producing financial
statements that are slanted by their opinions and biases.

Accounting Conventions
● Going concern - An entity prepares financial statements on a going concern basis when, under
the going concern assumption, the entity is viewed as continuing in business for the
foreseeable future. The concept of going concern is an underlying assumption in the
preparation of financial statements, hence it is assumed that the entity has neither the
intention, nor the need, to liquidate or curtail materially the scale of its operations.

● Consistency - The consistency principle states that, once you adopt an accounting principle or
method, continue to follow it consistently in future accounting periods so that the results
 reported from period to period are comparable. For eg- The company cannot keep changing
the policy of depreciation from straight line method to declining balance method every year.
This will produce distorted results.

● Accrual - Accrual accounting measures a company's performance and position by recognizing

economic events regardless of when cash transactions occur, whereas cash accounting only
records transactions when payment occurs.In General it is assumed that Accounts are always
prepared based on Accrual basis. However there are entities which follow Cash Basis of
Accounting Also. For eg - The company pays the salary of the month March 2021 on 5th April
2021, to its employees. In this case, even though the cash transaction of paying the salary
happens in the month of April, we would still record the transaction of salary in the month of
March because of accrual concept.

Types of accounts
● Nominal / temporary accounts
The accounts related to all incomes and expenses. Eg: Interest A/c, Rent A/c, Salary A/c, Etc.
● Personal accounts
Accounts of natural persons like Mr. Ramesh, Mr. Suresh, etc. Accounts of legal persons like
companies, banks, government, etc.
These persons are generally the buyers, sellers, lenders, investors, etc. associated with the
company. In short they are debtors or creditors.
● Real / Permanent accounts
These are accounts of various assets and goods.Eg: Buildings A/c, Machinery A/c, debtors’ A/c,
purchase A/c, Sales A/c.

Golden Rules of Accounting:

● Nominal / temporary accounts
Debit all expenses & losses
Credit all incomes & gains
● Personal accounts
Debit the receiver
 Credit the Giver
● Real / Permanent accounts
Debit what comes in
Credit what goes out

Accounting rule of thumb:

Nature of Balance Increase Decrease

Transaction

Asset Debit Debit Credit

Liability Credit Credit Debit

Capital Credit Credit Debit

Income Credit Credit Debit

Expenditure Debit Debit Credit

Further resources for for self-reading

https://online.hbs.edu/blog/post/how-to-read-financial-statements
https://online.hbs.edu/blog/post/how-to-read-a-balance-sheet
https://online.hbs.edu/blog/post/income-statement-analysis

Videos
https://www.youtube.com/watch?v=yYX4bvQSqbo