Lesson 1 of 5
Accounting basics: the language of business
2 min read
The accounting equation
Assets = Liabilities + Equity
Every transaction keeps this equation balanced. Example: a company borrows ₹5 lakh from a bank. Cash (asset) +5 lakh, loan (liability) +5 lakh.
Double-entry bookkeeping
Every transaction affects at least two accounts with equal debits and credits.
| Account type | Increases with | Decreases with |
|---|---|---|
| Assets | debit | credit |
| Expenses | debit | credit |
| Liabilities | credit | debit |
| Equity / capital | credit | debit |
| Income / revenue | credit | debit |
The traditional golden rules used widely in India:
- Personal accounts (people, companies, banks): debit the receiver, credit the giver.
- Real accounts (assets): debit what comes in, credit what goes out.
- Nominal accounts (expenses, income, gains, losses): debit all expenses and losses, credit all incomes and gains.
Journal entries to practise
- Started business with ₹10,00,000 cash: Cash A/c Dr 10,00,000 / To Capital A/c 10,00,000.
- Bought goods on credit from Sharma Traders ₹50,000: Purchases A/c Dr / To Sharma Traders A/c.
- Sold goods for cash ₹80,000: Cash A/c Dr / To Sales A/c.
- Paid rent ₹20,000: Rent A/c Dr / To Bank A/c.
- Depreciation on machinery ₹15,000: Depreciation A/c Dr / To Machinery A/c (or accumulated depreciation).
The accounting cycle
Transactions → journal → ledger → trial balance → adjustments (accruals, prepaid expenses, depreciation, provisions) → adjusted trial balance → financial statements → closing entries.
Key concepts
- Accrual basis: record revenue when earned and expenses when incurred, not when cash moves (required for companies). Cash basis records only cash movements.
- Matching principle: match expenses with the revenue they help generate.
- Prudence/conservatism: anticipate losses, don't anticipate gains.
- Going concern, consistency, materiality.
- Capital vs revenue expenditure: capital expenditure creates long-term assets (machinery: capitalised and depreciated); revenue expenditure is day-to-day (repairs, salaries: expensed).
- Standards: Ind AS (converged with IFRS) for larger Indian companies; Indian GAAP (AS) for others.
Check yourself
- Pass the journal entry: paid salary ₹40,000 by bank transfer.
- Is buying a laptop for office use capital or revenue expenditure?
- Explain accrual accounting with an example.
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