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Lesson 8 of 48 – Accounting Basics
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📘 Accounting Basics

Accounting is the process of recording, classifying, summarizing and reporting financial transactions of a business. Every business uses accounting to know its profit, loss, assets and liabilities.

Lesson Objective: Understand the basic concepts of accounting before learning Tally Prime.
1. What is Accounting?

Accounting is a systematic process of recording all financial transactions of a business.

Examples:
  • Purchasing Goods
  • Selling Products
  • Paying Electricity Bill
  • Receiving Money from Customers
  • Depositing Cash in Bank

Without accounting, a business cannot accurately determine its income, expenses, or financial position.

2. Objectives of Accounting
Objective Purpose
Record Transactions Maintain Business Records
Calculate Profit & Loss Know Business Performance
Prepare Financial Reports Business Analysis
Tax Compliance GST & Income Tax
Decision Making Future Business Planning
3. Types of Accounts

Every transaction in accounting belongs to one of these three account types.

Type Examples
Personal Account Ram, SBI Bank, Customers
Real Account Cash, Furniture, Building
Nominal Account Salary, Rent, Electricity Expense
These account types are used while applying the Golden Rules of Accounting.
4. Basic Accounting Terms
Term Meaning
Asset Property or resources owned by a business.
Liability Amount payable by the business.
Capital Owner's investment in the business.
Income Money earned.
Expense Money spent.
Profit Income greater than expenses.
Loss Expenses greater than income.
5. Accounting Equation

Assets = Capital + Liabilities

This is the basic accounting equation followed by every business.

Assets Capital Liabilities
Cash ₹1,00,000 ₹80,000 ₹20,000
Every accounting transaction affects this equation directly or indirectly.
6. Debit & Credit

Every accounting transaction has two aspects — Debit (Dr.) and Credit (Cr.). This is called the Double Entry System.

Debit (Dr.) Credit (Cr.)
Increase in Assets Decrease in Assets
Increase in Expenses Increase in Income
Decrease in Liabilities Increase in Liabilities
Decrease in Capital Increase in Capital
Example:
Purchased Furniture for Cash ₹20,000.

Furniture A/c → Debit ₹20,000
Cash A/c → Credit ₹20,000
7. Accounting Cycle

The Accounting Cycle is the complete process of recording business transactions from beginning to final reports.

  1. Identify Transaction
  2. Record in Journal
  3. Post to Ledger
  4. Prepare Trial Balance
  5. Prepare Final Accounts
  6. Prepare Balance Sheet
Tally Prime performs most of these steps automatically after voucher entry.
8. Double Entry System

Every financial transaction affects at least two accounts.

Transaction Debit Credit
Cash Received from Ram ₹5,000 Cash A/c Ram A/c
Paid Rent ₹2,000 Rent A/c Cash A/c
Purchased Goods for Cash Purchase A/c Cash A/c
Total Debit Amount = Total Credit Amount
9. Source Documents

Every accounting entry should be supported by a valid business document.

Document Purpose
Invoice Sales & Purchase
Cash Memo Cash Sale
Receipt Money Received
Payment Voucher Money Paid
Bank Statement Bank Transactions
Cheque Bank Payment
Good accounting always starts with proper supporting documents.
10. Basic Accounting Principles

Accounting follows internationally accepted principles to ensure accurate financial reporting.

Principle Meaning
Business Entity Business and Owner are separate.
Going Concern Business will continue in future.
Money Measurement Only monetary transactions are recorded.
Consistency Use the same accounting method every year.
Matching Principle Income and related expenses are recorded together.
Accrual Principle Record income and expenses when they occur.
These principles help prepare reliable financial statements.
11. Accounting Concepts with Practical Examples

Accounting concepts are basic rules that help maintain accurate financial records.

Concept Example
Business Entity The owner's personal expenses are not recorded as business expenses.
Going Concern The business is expected to continue operating for many years.
Money Measurement Employee honesty cannot be recorded, but salary paid can be recorded.
Consistency Use the same depreciation method every year.
Accrual Electricity bill is recorded even if payment is made next month.
Following accounting concepts helps prepare correct and reliable financial statements.
12. Common Accounting Mistakes
Mistake Correct Practice
Recording personal expenses as business expenses. Keep personal and business accounts separate.
Wrong debit or credit entry. Apply the Golden Rules correctly.
Ignoring bills and invoices. Maintain all supporting documents.
Not recording daily transactions. Record transactions on the same day.
Not reconciling bank accounts. Verify bank balance regularly.
Not taking backups. Create regular backups of accounting data.
Even a small accounting mistake can affect Profit & Loss, Balance Sheet and GST reports.
13. Real Business Example
Example - ABC Stationery Shop
Transaction Accounting Effect
Owner invested ₹2,00,000 Cash ↑ & Capital ↑
Purchased Goods ₹50,000 Purchases ↑ & Cash ↓
Sold Goods ₹80,000 Cash ↑ & Sales ↑
Paid Shop Rent ₹5,000 Rent Expense ↑ & Cash ↓
These transactions are entered into Tally Prime using different voucher types.
14. Practical Exercise & Interview Questions
Practical Exercise
  1. List five business transactions.
  2. Identify Assets, Liabilities and Capital.
  3. Classify five expenses and five incomes.
  4. Identify Debit and Credit in each transaction.
  5. Write the Accounting Equation for a sample business.
Interview Questions
  1. What is Accounting?
  2. What are the objectives of Accounting?
  3. What are Assets?
  4. What are Liabilities?
  5. What is Capital?
  6. What is the Accounting Equation?
  7. What is the Double Entry System?
  8. Why are source documents important?
  9. What is Debit?
  10. What is Credit?
15. Lesson Summary
  • Learned the meaning of Accounting.
  • Understood Accounting Objectives.
  • Learned Types of Accounts.
  • Studied Accounting Terms.
  • Learned the Accounting Equation.
  • Understood Debit & Credit.
  • Studied Double Entry System.
  • Learned Source Documents.
  • Understood Accounting Principles.
  • Completed practical examples.
Congratulations! You have completed the fundamentals of Accounting. The next lesson, Golden Rules of Accounting, will teach you how to decide which account should be Debited and which should be Credited.

🧠 Quick Quiz

Which accounting equation is correct?



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