Accounting: Accounting is the recording of financial transactions plus storing, sorting, retrieving,

summarizing, and presenting the information in various reports and analyses. Accounting is also a
profession consisting of individuals having the formal education to carry out these tasks.

Transaction: A business transaction is an economic activity of the business that changes its
financial position.
Transaction may be classified into two types:

External: External transactions are those which involve economic activities between two
independent business entities such as purchase or sale of goods.
Internal: Internal transactions are those economic activities that take place entirely within
one business entity such as depreciation charged on fixed assets.

Account: An account is a record of all business transactions relating to a particular person or item.
In accounting we keep a separate record of each individual, asset, liability, expense or income. The
place where such a record is maintained is termed as an Account.

Capital: It refers to the amount invested by the proprietor in a business enterprise.

Capital = Assets Liabilities

Drawings: Any cash or value of goods withdrawn by the owner for personal use or any private
payments made out of business funds are called drawings.

Liability: It refers to the amount which the firm owes to outsiders.

Liabilities = Assets Capital
Types of liabilities:

Internal liabilities: All amounts which a business entity has to pay to the proprietor or owner.
External liabilities: All amounts which a business entity has to pay to outsiders.
Long term liabilities or fixed liabilities: Liabilities which fall due for payment in a relatively
long period (normally after more than one year).
Short term liabilities or current liabilities: Liabilities which are to be paid in near future
(normally within one year).

Assets: Anything which is in the possession or is the property of a business enterprise including the
amounts due to it from others is called an asset.
Types of assets:

Fixed assets: Assets which are held for: continued use in the business for the purpose of
producing goods or services and are not meant for resale. Examples of fixed assets are Land
and Building, Plant and Machinery, motor Vehicles. Furniture etc.
1. Tangible and Intangible Assets:
i. Tangible assets are those assets which can be seen and touched.
Ex.: Building, Plant, Furniture, Cash etc.

ii.

Intangible Assets are those assets which do not have a physical existence
and which cannot be seen or felt. Ex. Goodwill, Patents, Trade marks

Current Assets: Current assets are those assets which are meant for sale or which the
management would want to convert in to cash within one year.
Examples: Cash in Hand, Cash At Bank, Bills Receivable, Short Term Investments, Debtors,
Stock and Prepaid Expenses.

Revenue: Revenue is the income of a recurring (regular) nature such as receipts from of goods,
rent, commission etc.

Expenditure: Any disbursement of cash or transfer of property or incurring a liability for the
purpose of acquiring assets, goods or services is called expenditure.

Capital expenditure: Any expenditure which is incurred in acquiring or increasing the value
of a fixed asset is termed as capital expenditure.
Revenue expenditure: Any expenditure, the full benefit of which is received during one
accounting period is termed as revenue expenditure.

Expense: Expense is the cost incurred in producing and selling the goods and services.
Income: Excess of revenue over expenses is called income.
Income = Revenue expense

Stock or Inventory: the term stock includes the value of those goods which are lying unsold
at the end of accounting period The Stock may be of two types :1) Opening Stock

2) Closing Stock

Sundry Debtor: Debtors represents those persons or firms to whom goods have been sold
or services rendered on credit and payment has not been received from them.
Sundry creditor: Creditors represents those persons or firms from whom goods have been
purchased or services procured on credit and payment has not been made to them.

Voucher: A voucher is a certificate or document that either allows you to purchase something
or proves that you paid for something. A voucher is sometimes valuable.

Discount: It is a rebate or an allowance given by the seller to the buyer. It is of two types:
1) Trade Discount: When discount is allowed by a seller to its customers at a fixed
percentage on the list or catalogue price of the goods it is called trade discount. It is
not recorded in the books of accounts.
2) Cash Discount: When Discount is allowed to the customers for making prompt
payment it is called cash discount. It is always recorded in the books of accounts.

All accounting transactions are recorded through journal entries that show account
names, amounts, and whether those accounts are recorded in debit or credit side
of accounts.
Methods of Accounting:

Single entry system maintains only personal accounts of debtors and creditors and cash
book.
Double entry system all personal, real and nominal accounts.

Classification of Accounts

Personal Accounts

Impersonal Accounts

Real Accounts

Nominal Accounts

PERSONAL ACCOUNT - These are accounts of parties with whom the business is a carried on.
Personal accounts may be:
Accounts of natural or physical persons. Ex: Rama Account, Krishna Account
Accounts of artificial or legal persons. Ex: ABC & Co.
Representative personal account. Ex: O/S Expenses Account, O/S income Account, Prepaid
Expenses Account, Income Received in Advance.
Rules of Accounting:
Debit the Receiver
Credit the Giver
Real Account - These are asset accounts that appear in the Balance Sheet. They are referred to as
Real Account (or Permanent Accounts) as these are owned by businesses and the balances in these
accounts at the end of an accounting period will be carried over to the next period.
Ex: Cash Account, Land Account, Building Account etc.
Rules of Accounting:
Debit what comes in
Credit what goes out
Nominal Account - These are accounts of expenses and losses which a business incurs and income &
gains which a business earn in the course of business.
Ex: Rent Account, Interest Account.
Rules of Accounting:
Debit all expenses and losses
Credit all income and gains