INTRODUCTION TO ACCOUNTING

& INVENTORY
 ACCOUNTING
… the language of BUSINESS
Through a systematic series of steps (accounting cycle), it collects information about business transactions and
generates reports about an organization.

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 Introduction
Now questions may come up to your mind like –

What do you mean by Accounting?

What is this Accounting Cycle (systematic series of Steps)?

What do you mean by business transactions?

What are these reports which gets generated for any organization?

Let’s take a moment to illustrate how Accounting is a means through which information about a business entity is
communicated. 3
 Illustration
Meet Mr. Jay who started his company Starlit InfoTech which deals in IT hardware and software
products. He invested his personal money of 20 lakhs to start the company’s operations. After a month, he
wants to know how much money the company has made. He also wants to know if the money which he
invested is still there.

Without a way of recording the activities of Starlit InfoTech, we will not be able to answer his questions. We
can surely tell Mr. Jay that “Mr. Jay, we made a lot this month!”, but we need proof! And he would like to
know the figures! Starlit InfoTech

We can easily answer Mr. Jay’s questions by keeping track of Starlit InfoTech’s transactions. If we used ₹
1,00,000/- out of ₹ 20,00,000/- for buying Laptops and paying bills, then we would have left with cash of ₹
19,00,000/-. If we have collected ₹ 50,000/- from customers, then we would have ₹ 19,50,000/- cash, right?
Easy?

That’s just a bit of what accounting can do. What if we have thousands of transactions? Also, there's a lot
more to accounting than just recording. How much income did we make? How much do we owe our
Suppliers?

Through Accounting, you will have all the reports prepared.

Let us take few more examples of other businesses. 4
 Cinema Hall

A business owner of a Cinema Hall would need to know –

1. How many tickets got sold and for how much amount?

2. How much amount needs to be paid to distributors of the film?

3. How much are the expenses for managing the Cinema Hall?

4. How much salary is paid to workers? etc.,

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 Grocery shop

A Grocery Shop owner, would need to know-

1. Out of the total material which he has bought, how much quantity of it got sold?

2. How many customers bought for cash and how many on credit, because –

- We need to know how much cash is with cashier and

- How much money needs to be collected from credit customers?

3. Similarly, the shop may buy the goods from Supplier on credit. We need to know how much money is to be paid. etc.

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 Hospital

Hospital owners need to know –

1. How many patients come in and how much money have they received for different services?

2. How much they need to pay to visiting Doctors?

3. How much money is to be paid to Suppliers, Salaries to staff?

4. How much cash is available by end of the day, bank balances, etc.,

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 Introduction
As a businessman, this gives you an idea of –
1. How the money is flowing out of your business? – Purchases or Expenses
2. From where the money is flowing into your business? – Sales or Income
3. How much material you bought? Out of which, how much has been sold? What is the balance stock available with you? – Stock
(Purchase – Sales = Balance / Closing stock)
4. How much profit have you earned on the sales? – Purchase Cost + Profit margin

When you start recording all these business transactions into your books of accounts, it will run into multiple pages. Hence, it is important to
record it in a systematic manner which will help you to generate important reports to analyze the health of your business.
As a businessman, it is very important for you to know –
5. Whether your business is making Profit or Loss?
6. What you own? (Assets, Stock etc.)
7. What you owe to others? (Suppliers, Loan taken from Financial institutions etc.)
Understanding all these will help you to succeed in your business.
Now let us learn the Accounting system by building a story together about a businessman who wants to start a new business. 8
Preface

In this session, you will understand the Fundamentals of Accounting and Inventory
through a story of a person who is starting a new business.
 Story to ‘Accounting Basics’

Mr Jay is a hard worker and a smart man and knows that in order to make his
business successful he must keep a close eye on –
1. How much money is he making?
2. How much he owes who and who owes him any given day? Starlit InfoTech

3. Whether he has enough cash to be able to sustain and grow his business?
4. Whether he has enough stock to fulfill the orders placed by his clients on time?
To do this, he knows he must be disciplined in his accounting and inventory
management, however, he is not comfortable with the matters of accounting and
inventory. He assumes he will use some accounting software but wants to check with
his Chartered Accountant before making his selection.
He asks his friend to recommend a professional accountant who is ALSO skilled in
explaining accounting and inventory concepts and its impact on Financial Statements
to someone WITHOUT an accounting background, so that he can always be on top
of his new business.
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 Story to ‘Accounting Basics’

Mr. Jay brings in 20,00,000/- in cash as an investment to start his business. Now, let us understand the
difference between Mr. Jay (The Owner) and Starlit InfoTech (The Business itself). 

Let us understand the concept of separate legal entity.

Once Starlit InfoTech is formed and registered with required government authorities (has a GST number, own
Bank Account, own PAN or its own registration as per the Shop and Establishment registration act). Different
rules and registrations may apply according to different countries.

Post these registration formalities, Starlit InfoTech becomes an independent separate legal entity and is
separate from Mr. Jay in all respects. You will understand this concept in more detail, as we move further to
record business transactions of Starlit InfoTech.
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Mr. Jay’s friend recommends Mr. Veer, an Accountant who
has helped many of his friends’ small business customers.

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Session 1

Introduction to Accounting Basics

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 Veer, in order to make my
Veer, in order
business to make my
successful, I need to
business
closely monitor all the to
successful, I need
closely monitor
operations. ButallI the
am not so
operations.
familiar with the not so
But I am
familiar with the and
ACCOUNTING
ACCOUNTING
INVENTORY and management.
INVENTORY management.
Can you help me to
Can you help me
understand it? to
understand it?
Veer Jay
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 Jay, let me give you an overview of
Jay, let me givefirst
Accounting youand
an then
overview
later of
take
Accounting first and then later take
you through inventory concepts too.
you through inventory concepts too.

Veer Jay
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 Sure Veer, please explain me
Sure Veer,
about please explain me
ACCOUNTING?
about ACCOUNTING?

Veer Jay
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 ACCOUNTING is a means
ACCOUNTING is a means
through which information
through which information
about a business entity is
about a business entity is
communicated.
communicated.
‘Accounting’ means recording,
‘Accounting’ means recording,
classifying, and summarizing
classifying, and summarizing
the day-to-day business
the day-to-day business
transactions of Starlit
transactions of Starlit
InfoTech in a systematic
InfoTech in a systematic
manner and interpreting the
manner and interpreting the
results thereof. Veer Jay
results thereof.
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 What do you mean by these
What do–you
terms mean by these
Recording,
terms – Recording,
Classifying, Summarizing
Classifying, Summarizing
and Interpreting results?
and Interpreting results?

Veer Jay
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 Recording means writing down OR
Recording means writing
keeping records of your down OR
business
keeping records of your business
transactions.
transactions.
Classifying involves grouping
Classifying involves
similar items grouping
that have been
similar items
recorded. that have been
recorded.
Once the transactions are classified,
Once
the the transactions
information getsare classified,
summarized
theinto
information gets summarized
reports which we call as
into reports which we
Financial Statements. call as
Financial Statements.
Interpreting results is part of the
Interpreting results is part
phases of accounting. Theofamounts
the
phases of accounting.
and other data in theThe amounts
financial
andreports
other have
data in the financial
meanings that are
reports have meanings
useful to the users. that are
useful to the users.

Veer Jay
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 Tracking Starlit InfoTech’s
Tracking Starlit InfoTech’s
business transactions is
business transactions is
important as it will help you to
important as it will help you to
understand from where the
understand from where the
money is flowing into / out of
money is flowing into / out of
your business.
your business.

Veer Jay
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 Also, recording transactions
Also, recording transactions
systematically and accurately
systematically and accurately
will help you to generate the
will help you to generate the
information that you need to
information that you need to
manage and grow your
manage and grow your
business..
business..

Veer Jay
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Mr. Jay seems puzzled by the term “Transaction”

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So Veer gives Mr. Jay seven examples of business transactions that Starlit InfoTech will need to record.
1. No doubt, Jay will start his business by putting some of his own personal money into it.

2. Starlit InfoTech need to buy a Delivery Vehicle to deliver goods to their clients.

3. Business will start buying goods for trading purpose. For e.g. 5 numbers of Laptops bought from supplier

4. Business will start billing to their clients for the goods sold. For e.g. 2 numbers of Laptops sold

5. Business will collect money from their clients.

6. Business will pay money to their suppliers.

7. Business will incur expenses in operating their business, such as Conveyance, Advertising, Salary to employees etc.

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 Jay, these business transactions
Jay,
thusthese business
becomes the coretransactions
of Financial
thus becomes
Statements the core
that of Financialget
would
Statements
generated forthat would
Starlit InfoTech. get
generated for Starlit InfoTech.

Veer Jay
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 Jay, Running a business without
Jay, Running a business
understanding without
financial statements
understanding financial statements
is like driving a car without a
is like driving a car without a
dashboard.
dashboard.

Veer Jay
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 Jay, as a business owner you need
Jay,
to as a business
know owner
higher level you need
concepts
to rather
know higher
than justlevel concepts
understanding
rather than justlevel
transaction understanding
bookkeeping.
transaction level bookkeeping.

Veer Jay
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 Veer, now that I have
Veer, now that
understood I have
‘transactions’,
understood ‘transactions’,
can you also give me an
canoverview
you also ofgive ‘Financial
me an
overview of ‘Financial
Statements’?
Statements’?

Veer Jay
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 Overview of Financial
Statements’?

Jay, Financial statements will provide

Jay,you
Financial statements
information will
about the provide
overall health
youofinformation about
Starlit InfoTech. the overall health
of Starlit InfoTech.
You should be able to read and analyze
You should beStatements
Financial able to read to and
knowanalyze
–
Financial Statements to know –
• What Starlit InfoTech owns (Assets)
• • What
HowStarlit
muchInfoTech owns (Assets)
it owes (Liabilities) and
• • How much it owes (Liabilities)
How profitable is your business?and
• How profitable is your business?
Understanding Financial statements is
Understanding Financial
important to ensure you statements
remain is
important to ensure
competitive in theyou remain
market.
competitive in the market.

Veer Jay
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 Veer, Which are these
Veer, Which are these
FINANCIAL
FINANCIAL
STATEMENTS that I need
STATEMENTS that on?
to keep close tabs I need
to keep close tabs on?

Veer Jay
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 Jay, Financial statements refer to specific
Jay,setFinancial
of reportsstatements
that wouldrefer to specificfor
get generated
setStarlit
of reports that would get generated for
InfoTech.
Starlit InfoTech.
The two important financial statements
Thewhich
two important
you shouldfinancial statements
keep tabs on is the
which you should keep tabs on
Profit & Loss A/c and Balance is the
Sheet.
Profit & Loss A/c and Balance Sheet.

Veer Jay
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 Ok, What’s the difference
Ok, What’sthese
between the two
difference
financial
between these
statements? two financial
statements?

Veer Jay
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 Jay, Profit & Loss A/c is a statement
Jay, Profit & Loss A/c is a statement
that will show you, how profitable
that will show
Starlit you, has
InfoTech profitable
howbeen during the
Starlit InfoTech has been during the
year. It mainly focuses on company’s
year. It mainly
Income focuses on company’s
and Expenses
Income and Expenses
You may choose to see this report for
You may
any choose
given to see
period thisa week,
viz., reportmonth,
for
any givenhalf
quarter, period
year orviz., a week,
a year month,you
(whichever
quarter,
feel ishalf
mostyear or a year (whichever you
useful).
feel is most useful).
Veer Jay
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 Further, Balance Sheet will
Further, Balance Sheet will
show you - What Starlit
show you - What Starlit
InfoTech “owns” (Assets) and
InfoTech “owns” (Assets) and
What it “owes” (Liabilities) at
What it “owes” (Liabilities) at
specific point in time.
specific point in time.
We will see these two financial
We will see these two financial
statements in detail later.
statements in detail later.
Veer Jay
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FUNDAMENTALS OF ACCOUNTING
(Introduction)
RECAP
RECAP

In this session of Introduction to Fundamentals of

Accounting, Jay understood from Veer the following –
 What do you mean by Accounting?
 What do you mean by Transactions?
 Why do you need to analyze Financial Statements?
 Which are the two Financial Statements, which Jay needs
to keep tabs on?

In upcoming sessions, Veer will explain the purpose of

the two main Financial Statements:
• Profit & Loss A/c (Also referred as Income
Statement)
• Balance Sheet

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 Role Play
Players –
1. Owner
2. Accountant

Do a role-play, where one acts as a Owner (who doesn’t know anything

about Accounting) and other acts as an Accountant who imparts
knowledge on Accounting to owner.

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