What are Accounting Basics

Yesterday, I received on call from an advocate who is BA, LLB who is doing CS from ICSI. He is asking me to explain my CS accounting notes because he was not understanding advance concepts of accounting in my CS accounting notes. I suggested him to learn accounting basics. Then he asked me about the accounting basics. So, today, I am explaining some accounting basics which are important to non-commerce students who are studying advance accounting.

Definition : Accounting basics are the collection of some accounting knowledge which will be the base of every accounting work. 

1. Knowledge of Assets, Liabilities, Capital, Expenses and Incomes 

When a person starts a business, he needs capital but it may not be sufficient to operate business. So, he takes some loan. It is the liability of business. Accounting helps to record all the liabilities when we take loan whether it is short term or long term. When it in the form of buying goods on credit or taking advance before providing goods or service. All are liabilities. Assets are bought from capital or taken liabilities. No one gives you the assets in free form. Assets may be any physical good or machine or plant or building or vehicle which will give you short or long term benefits. Every payment may not be for buying assets. We get service, so, we have to pay. This is our expenses. These services, we may get in the form of employee's duty, lighting, calling on the mobile and using of internet. For this, we have to pay salary, lighting bill, recharge bill and internet bill. Incomes are the benefits which we get from other party. When we sell the goods, we get its money, it is also part of our income. When we provide any service, we get its fees. It is also our income.

2. Knowledge of Debits and Credits 

Knowledge of debits and credits are also important to know accounting basics. Debits and credits are two parts of any transaction. Debit is just taking the benefit and credit is just giving the benefit. For example, you started business with Rs. 1,00,000. Debit is cash and credit is capital. It means business is getting the benefit of money in the form of cash. So, it will be debit. Business is also giving the benefit to businessman my converting his money in the form of capital. You remember that there is big difference money in pocket and money in the form of capital. Money in the form of capital will increase day by day by adding profit in it. But your pocket money will be same without any change. So, debit and credit is just like take and give theory. Debit and credit is just + and - theory. Debit and Credit is the way to balance every transaction.

3. Knowledge of Accounting Concepts and Principles 

Knowledge of accounting concepts and principles will make you enrich to understand accounting. Accounting concepts and principles are not fix regulation. From time to time, it needs modernization. For example, accounting equation is assets equals to liabilities. But know this concept became more clear with following expand formula

Total assets = capital + incomes - expenses - drawing + outside liabilities 

4. Knowledge of Accounting Rules 

Accounting rules are also called journal entry rules. There are six rules in every nature of account. In personal accounts, debit will be the person who receives anything from business and credit will be the person who gives anything to the business. In real account, every asset which comes in the business will be debit and every  assets which goes from business will be credit. In nominal account, every expense or loss of business will be debit and every income or gain will be credit.

5. Knowledge of Making journal, ledger and trial balance 

On the basis of above accounting rule, journal is made. One the basis of posting rule, we make ledger account. Trial balance is just list of debit and credit balance of ledger accounts. With trial balance, we know our mathematical mistake in journal and ledger.

6. Knowledge of Making Final Accounts 

Final accounts is the summery of all financial records which shows the result of financial position and performance. In final accounts, we make profit and loss account and balance sheet. Both are important financial statements. One more important financial statement is also prepared which is called cash flow statement. It shows the changes in the cash position for a particular period. 


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Accounting Education: What are Accounting Basics
What are Accounting Basics
Accounting Education
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