Mastering Accounting Basics: A Beginner-Friendly Guide

Five Main Accounts Think of accounts as buckets where we record money-related activities. These five are the foundation:

• Assets

  What the company owns.

  Example: Cash in hand, furniture, machines, or even money customers still owe (called receivables).

  Imagine you buy a bike. That bike is your asset because you own it and it has value.

• Liability

  What the company owes to others.

  Example: Bank loan, unpaid bills to suppliers.

  Like if you borrowed ₹50,000 from a friend to buy that bike, that’s your liability.

• Revenue

  Money earned from selling goods or services.

  Example: A school collecting tuition fees or a shop selling clothes.

  If you sell your bike ride service for ₹200 per trip, that’s revenue.

• Equity

  The owner’s share in the business after paying off liabilities.

  Example: If your shop has ₹100,000 in assets and ₹40,000 in liabilities, equity = ₹60,000.

  Think of it as “what belongs to the owner”.

• Expenses

  Money spent to run the business.

  Example: salary, rent, electricity bill. If you spend ₹500 on petrol for your bike service, that’s an expense.

Key Financial Statements

These are like the report cards of a business:

• Balance Sheet

  Shows what the company owns (assets) and owes (liabilities) at a point in time.

  Example: On 31st March, a school’s balance sheet shows buildings, computers, and loans.

• Income Statement (Profit & Loss)

  Shows revenue and expenses over a period, telling if the company made a profit or loss.

  Example: A shop’s income statement shows sales of ₹100,000 and expenses of ₹80,000 → Profit of ₹20,000.

• Cash Flow Statement

  Tracks actual cash movement (inflow & outflow).

  Example: Even if a shop sells goods on credit, cash flow shows only cash received.

Depreciation Methods & Types

Depreciation is the reduction in value of assets over time. Think of your mobile phone: you bought it for ₹20,000, but after 2 years, it’s worth much less.

• Straight Line Method (SLM)

  Equal depreciation every year.

  Example: A machine worth ₹100,000 with a life of 10 years → ₹10,000 depreciation each year.

• Written Down Value (WDV)

  Depreciation on reducing balance.

  Example: Machine ₹100,000, 10% depreciation → Year 1: ₹10,000, Year 2: ₹9,000, and so on.

• Units of Production Method

  Based on usage.

  Example: If a machine produces 100,000 units in its life, and in year 1 it makes 10,000 units, then depreciation = 10% of cost.

Journal entries are like diary notes of transactions. Let’s see common ones:

Transaction	Debit (Dr)	Credit (Cr)
Purchase (Buying goods for resale)	Purchase A/c	Cash / Bank A/c
Cash deposited into Bank	Bank A/c	Cash A/c
Sale of goods	Cash / Bank A/c	Sales A/c
Rent received in cash	Cash A/c	Rent A/c
Rent paid in cash	Rent A/c	Cash A/c
Salary accrued (due but not paid)	Salary Expense A/c	Salary Payable A/c
Salary paid through bank	Salary Payable A/c	Bank A/c
Credit sale (Accounts Receivable)	Accounts Receivable A/c	Sales A/c
Credit purchase (Accounts Payable)	Purchase A/c	Accounts Payable A/c

• Trade Discount

  • A reduction in price given by the seller to the buyer at the time of purchase.

  • It’s usually for bulk buying or special customers.

  • Important: The trade discount is not recorded in books. Only the net amount after discount is entered.

  Example:

  A supplier sells goods worth ₹10,000 with a 10% trade discount.

  • Discount = ₹1,000 → Net price = ₹9,000.

  • Entry is made only for ₹9,000.

  Entry:

  Purchase A/c Dr To Supplier A/c

• Cash Discount

  • A discount is given to encourage early payment.

  • Unlike trade discount, cash discount is recorded in books.

  • Two types:

    Discount Allowed → Expense for the seller.

    Discount Received → Income for the buyer.

  Example:

  You owe ₹5,000 to a supplier. If you pay within 10 days, you get a 5% cash discount.

  Discount = ₹250 → You pay ₹4,750.

  Entry:

  Supplier A/c Dr 5,000 To Cash A/c 4,750 To Discount Received A/c 250