Introduction to Accounting: Basics and Examples

 1. Basics of Accounting

Key Terms and Definitions

  1. Assets: Resources owned by a business (e.g., cash, inventory, buildings).
    • Example: If a company buys a car for its operations, the car is considered an asset.
  2. Liabilities: What the business owes (e.g., loans, accounts payable).
    • Example: A bank loan taken to purchase new machinery is a liability.
  3. Income: Money earned by the business from its operations (e.g., sales revenue).
    • Example: If a store sells products worth ₹10,000, that amount is income.
  4. Expenses: Costs incurred by the business (e.g., rent, salaries).
    • Example: Monthly rent of ₹5,000 for office space is an expense.
  5. GAAP (Generally Accepted Accounting Principles): A set of rules and standards used in accounting to ensure consistency and transparency.

Financial Accounting vs. Cost Accounting vs. Management Accounting

  • Financial Accounting: Focuses on creating financial statements for external users.
  • Cost Accounting: Analyzes costs related to production to help control expenses.
  • Management Accounting: Provides information to managers for decision-making.

2. The Accounting Process

This includes steps such as journal entries, ledger accounts, and preparing a trial balance.

Journal Entries

Journal entries record each transaction in chronological order.

  • Example: A company purchases office supplies for ₹2,000. The journal entry would be:
    • Debit: Office Supplies ₹2,000
    • Credit: Cash ₹2,000

Ledger Accounts and Trial Balance

After recording journal entries, they are posted to ledger accounts to categorize transactions. A trial balance is then prepared to ensure that debits equal credits.

3. Understanding IFRS, AS, and IND AS

These are accounting standards that guide the preparation of financial statements.

  • IFRS (International Financial Reporting Standards): Used globally, ensuring transparency and comparability.
  • AS (Accounting Standards): Set of standards used in India.
  • IND AS (Indian Accounting Standards): Adapted from IFRS to suit Indian companies.

4. Introduction to Forensic and Carbon Accounting

  • Forensic Accounting: Uses accounting skills to investigate fraud or embezzlement.
    • Example: Detecting financial discrepancies in a company's records to find evidence of fraud.
  • Carbon Accounting: Measures a company’s carbon emissions to assess environmental impact.

5. Depreciation

Depreciation is the reduction in the value of an asset over time.

  • Straight Line Method (SLM): Depreciates assets equally over their useful life.
    • Example: If a machine worth ₹1,00,000 is expected to last 10 years, annual depreciation would be ₹10,000.
  • Written Down Value (WDV) Method: Depreciates assets at a fixed percentage each year on the reducing balance.
    • Example: If the same machine depreciates at 10% per year, the depreciation amount decreases each year.

6. Preparation of Financial Statements

The two main financial statements prepared are:

  • Profit & Loss Account: Shows the company’s revenue, expenses, and profit or loss over a period.
  • Balance Sheet: Lists assets, liabilities, and equity, providing a snapshot of the company’s financial position at a specific time.

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