Basic Accounting

A Journal is the first book of accounts where all financial transactions are recorded in chronological order. It is also known as the Book of Original Entry. Each transaction is recorded as a journal entry, which includes the date, accounts involved, amounts, and a brief description.

Golden Rules of Journal:

• Personal Account: Debit the receiver, Credit the giver.
• Real Account: Debit what comes in, Credit what goes out.
• Nominal Account: Debit all expenses and losses, Credit all incomes and gains.

Step-by-Step Guide:

1. Identify the accounts involved in the transaction.
2. Determine whether each account is debited or credited based on the golden rules.
3. Record the transaction in the journal with the date, accounts, amounts, and description.

Example of a Journal Entry:

Additional Examples:

A Ledger is a book of accounts where all journal entries are posted to their respective accounts. It is also known as the Book of Final Entry. The ledger helps in summarizing the financial position of each account.

Golden Rules of Ledger:

• Each account has a separate ledger page.
• Post journal entries to the respective ledger accounts.
• Calculate the balance of each account after posting.

Step-by-Step Guide:

1. Transfer journal entries to the respective ledger accounts.
2. Calculate the total debits and credits for each account.
3. Determine the balance of each account (debit or credit).

Example of a Ledger Account:

A Cashbook is a financial journal that records all cash receipts and payments, including bank deposits and withdrawals. It serves as both a journal and a ledger for cash transactions.

Golden Rules of Cashbook:

• Record all cash inflows (receipts) on the debit side.
• Record all cash outflows (payments) on the credit side.
• Maintain a running balance after each transaction.

Step-by-Step Guide:

1. Record cash receipts on the debit side of the cashbook.
2. Record cash payments on the credit side of the cashbook.
3. Calculate the running balance after each transaction.

Example of a Cashbook:

A Petty Cashbook is used to record small, day-to-day expenses such as office supplies, postage, or minor repairs. It helps in managing small cash transactions without affecting the main cashbook.

Golden Rules of Petty Cashbook:

• Record all petty cash expenses with proper vouchers.
• Maintain a running balance of petty cash.
• Replenish the petty cash fund when it runs low.

Step-by-Step Guide:

1. Record petty cash expenses with dates and descriptions.
2. Attach vouchers for each expense.
3. Calculate the remaining petty cash balance.

Example of a Petty Cashbook:

Accounting is a broad field that can be divided into several branches, each with its own specific focus and purpose. Here are the main branches:

Main Branches of Accounting:

• Financial Accounting: Records, classifies, and summarizes financial transactions to prepare financial statements for external users.
• Managerial Accounting: Provides financial and non-financial information to managers for decision-making, planning, and control.
• Tax Accounting: Focuses on compliance with tax laws and regulations and the preparation of tax returns.
• Auditing: Involves the examination and verification of financial statements and records to ensure accuracy and compliance with laws and regulations.
• Cost Accounting: Tracks the costs of production and services to help in pricing and cost control.
• Forensic Accounting: Applies accounting, auditing, and investigative skills to legal issues and disputes.
• Governmental Accounting: Deals with the financial reporting and management of government entities.
• Not-for-Profit Accounting: Focuses on the financial management and reporting of non-profit organizations.

Accounts in accounting are categorized into three main types based on their nature and purpose:

Main Types of Accounts:

• Personal Accounts: Relate to individuals, firms, or organizations. Examples include capital accounts, drawings, and creditors/debtors.
• Real Accounts: Relate to assets or properties. Examples include land, buildings, machinery, and furniture.
• Nominal Accounts: Relate to income, expenses, gains, and losses. Examples include sales, purchases, salaries, and rent.

Golden Rules of Accounting:

• Personal Account: Debit the receiver, Credit the giver.
• Real Account: Debit what comes in, Credit what goes out.
• Nominal Account: Debit all expenses and losses, Credit all incomes and gains.

Understanding these foundational concepts is crucial for grasping the principles of accounting:

Key Foundational Concepts:

• Double-Entry System: Records each transaction in at least two accounts, ensuring that the accounting equation (Assets = Liabilities + Equity) remains balanced.
• Accounting Period: The time frame for which financial statements are prepared, typically a month, quarter, or year.
• Accrual Basis Accounting: Recognizes revenues when earned and expenses when incurred, regardless of when cash is received or paid.
• Cash Basis Accounting: Recognizes revenues when cash is received and expenses when cash is paid.
• Matching Principle: Expenses should be matched with the revenues they help to generate in the same accounting period.
• Going Concern Assumption: Assumes that a business will continue to operate indefinitely and not be liquidated.
• Consistency Principle: Consistent accounting methods should be used from period to period to ensure comparability.
• Materiality: Information is material if its omission or misstatement could influence the decision of users of financial statements.
• Prudence: Anticipate no profit and provide for all possible losses.
• Historical Cost Principle: Assets are recorded at their historical cost, which is the original cost of the asset at the time of acquisition.
• Revenue Recognition Principle: Revenue is recognized when it is earned, not necessarily when cash is received.
• Full Disclosure Principle: All relevant financial information should be disclosed in the financial statements or the accompanying notes.
• Objectivity Principle: Financial statements should be based on objective evidence and not on personal opinions or biases.