Accounting is more than analyzing, recording and classifying monetary data. It also includes presentation of useful information to the management. The accounting basics are very simple and easy to understand.
Any transaction which involves money has two effects. Based on this, double entry system of accounting has evolved.
For Example, I received Rs. 10,000 from my uncle as loan. So it affects cash and Loan A/c. It means cash will increase and on other side my loan will also increased. To conclude every transaction has two effects one is Debit and other is credit. In the above example cash is debited and loan A/c is credited.
In accounting we need to find out the profit & Loss from the transactions and prepare a Balance Sheet showing the Assets and Liabilities
In Profit and loss account we show the expense in the right hand side and income on the left hand side.
|Printing & Stationary|
|Interest on loan|
|Repair and Maintenance|
|Legal & Professional Fees|
If Income side is greater than expense side then, profit will be booked. Otherwise loss will be booked.
After that Balance sheet is prepared. Balance sheet shows the assets and liabilities of a person.
|Liabilities||Amount (Rs.)||Assets||Amount (Rs.)|
|Cash & Bank Balance|
The Liabilities and Assets side should always match.
So every transaction will either go to profit & Loss account or Balance sheet. Like in above example Cash will go to asset side and Loan will go to liability side of balance sheet.
You will need to fit the below mentioned rules of double entry system. This is also called golden rules of accounting.
For this purpose the accounts are divided into three category:
- Personal Accounts: These accounts records dealings with a person. The person receives something is given debit and person giving something is given credit.
- Real Accounts: These are accounts of assets. Asset entering in business is given debit and asset leaving is given credit.
- Nominal Account: These accounts deals with expense, income, profit & Loss. Income is always credited and expense is always debited.
So in short we can we can say,
Personal Accounts: Debit the receiver, credit the giver
Nominal Accounts: Debit the expenses and credit the income
Real accounts: Debit what comes in and credit what goes out.
Mr. A purchased a laptop for Rs. 30,000/-
The two accounts affected are purchase of laptop and cash given for purchase.
Since laptop is out asset, so debit what comes in and cash is also out asset, so credit what goes out.
Laptop A/c ………………..Debit 30,000
Cash A/c …………………..Credit 30,000
Likewise entries are passed and they finally go to profit & loss account or balance sheet.
Hope you have understand the accounting Basics. Please comment for any query on Accounting Basics.