Accounting and Book-keeping Fundamentals
Book-keeping and accounting
Book-keeping is the recording of transactions in a systematic manner - journal, ledger and trial balance. Accounting is wider: it records, classifies, summarises, analyses, interprets and communicates results to users. Accounting is called the language of business for this reason.
Double entry and the equation
Every transaction has two aspects. The accounting equation is Assets = Liabilities + Capital. Rules: personal accounts - debit the receiver, credit the giver; real accounts - debit what comes in, credit what goes out; nominal accounts - debit expenses and losses, credit incomes and gains.
Concepts and conventions
Going concern, business entity, money measurement, accrual, matching, consistency, prudence, materiality and periodicity. These are assumptions, not legal rules.
Worked example
A trader starts with ₹1,00,000 cash, buys furniture for ₹20,000 and buys goods on credit for ₹30,000. Reasoning: cash falls to ₹80,000, furniture is ₹20,000 and stock is ₹30,000 - assets total ₹1,30,000; capital ₹1,00,000 plus creditor ₹30,000 also equals ₹1,30,000, so the equation holds.
Traps that cost marks
- Believing a tallied trial balance proves there are no errors; errors of omission, commission, principle and compensating errors leave it balanced.
- Saying accounting and book-keeping are identical.
- Debiting an expense instead of crediting it.
- Treating drawings as a business expense.