Free preview · Lesson 1
Accounting Basics and Golden Rules
Double-entry system
Every transaction affects at least two accounts: one is debited and another credited with the same amount. That is why total debits always equal total credits.
The accounting equation
Assets = Liabilities + Capital. If assets are ₹8,50,000 and liabilities ₹3,20,000, capital is ₹5,30,000.
Types of accounts and golden rules
- Personal (people, firms, banks): Debit the receiver, credit the giver.
- Real (assets: cash, machinery, furniture): Debit what comes in, credit what goes out.
- Nominal (expenses, losses, incomes, gains): Debit all expenses and losses, credit all incomes and gains.
Journal entries – worked examples
- Rent paid in cash ₹10,000: Rent A/c Dr (expense) To Cash A/c (asset going out).
- Goods bought from Joseph Traders on credit ₹25,000: Purchases A/c Dr To Joseph Traders A/c (the giver).
- Cash sales ₹8,000: Cash A/c Dr To Sales A/c.
- Owner brings capital ₹2,00,000: Cash A/c Dr To Capital A/c.
Journal → Ledger → Trial balance
- The journal is the book of original entry, in date order.
- Entries are posted to individual ledger accounts and balanced.
- A trial balance lists all ledger balances to check arithmetical accuracy. It can still tally despite errors of omission or compensating errors.
Capital vs revenue
- Capital expenditure gives benefit for years: buying a computer, machinery or building.
- Revenue expenditure is for day-to-day running: salary, electricity, repairs.