Accounting forms the backbone of every business, enabling efficient management of finances and decision-making. Understanding the basic concepts of accounting is crucial for anyone learning TallyPrime, as it serves as the foundation for all financial record keeping and transactions.
1. What is Accounting?
Accounting is the process of recording, classifying, summarizing, and interpreting financial transactions. It helps businesses track their income, expenses, assets, liabilities, and equity. Accounting ensures that financial records are accurate and comply with legal and regulatory standards.
Key Functions of Accounting:
- Recording Transactions: Accurate entry of financial transactions into books of accounts.
- Classifying Data: Grouping similar financial transactions together.
- Summarizing: Preparing financial statements such as balance sheets and profit & loss accounts.
- Interpreting Data: Analyzing financial data to make informed business decisions.
Entity Concept
The entity concept states that the business is a separate entity from its owners. This means that personal transactions of the owner(s) should not be mixed with the financial transactions of the business.
For example:
If an owner withdraws money from the business for personal use, it should be recorded as a drawing in the accounting books and not as an expense for the business.
Financial Statements
The ultimate goal of accounting is to prepare financial statements that provide a clear picture of a business’s financial health. The two primary financial statements are:
a. Balance Sheet
A balance sheet provides a snapshot of a business’s financial position at a specific point in time. It lists assets, liabilities, and equity.
- Assets are what the business owns (e.g., cash, inventory, buildings).
- Liabilities are what the business owes (e.g., loans, accounts payable).
- Equity represents the owner’s interest in the business (e.g., capital, retained earnings).
b. Profit and Loss Account (Income Statement)
This statement summarizes a business’s revenues and expenses over a period, typically a year, to show whether the business made a profit or incurred a loss.
- Purchase : A purchase means goods/services purchased by a businessman / business from suppliers.
- Sales : Sales is goods sold by a businessman / business to his customers.
- Purchase Return or Rejection out or Outward Invoice : Purchase return means the return of the full or a part of goods purchased by the businessman to his suppliers.
- Sales Return or Rejection in or Inward Invoice : Sales return means the return of the full or a part of the goods sold by the customer to the businessman.
- Assets : Assets are the things and properties possessed by a businessman not for resale but for the use in the business.
- Liabilities : All the amounts payable by a business concern to outsiders are called liabilities.
- Capital : Capital is the amount invested for starting a business by a person.
- Debtors : Debtor is the person who owes amounts to the businessman.
- Creditor : Creditor is the person to whom amounts are owed by the businessman.
- Debit : The receiving aspect of a transaction is called debit or Dr.
- Credit : The giving aspect of a transaction is called credit or Cr.
- Drawings : Drawings are the amounts withdrawn (taken back) by the businessman from his business for his personal, private and domestic purpose. Drawings may be made in the form cash, goods and assets of the business.
- Receipts : It is a document issued by the receiver of cash to the giver of cash acknowledging the cash received voucher.
- Account : Account is a summarized record of all the transactions relating to every person, every thing or property and every type of service.
- Ledger : The book of final entry where accounts lie.
- Journal entries : A daily record of transaction. Trail Balance : It is a statement of all the ledger account balances prepared at the end of particular period to verify the accuracy of the entries made in books of accounts.
- Profit : Excess of credit side over debit side.
- Profit and loss account : It is prepared to ascertain actual profit or loss of the business.
- Balance Sheet : To ascertain the financial position of the business. It is a statement of assets and liabilities.
- Current asset : It is converted into cash with in a year. Ex. Bills receivable
- Direct expenses : These are the expenses which are directly related to manufacturing of goods. Ex. Wages, factory rent, heating, lighting etc
- Indirect expense : These are the expenses which are indirectly related to manufacturing of goods. Ex. Salary, rent, stationery, advertisement, printing
- Depreciation : Decrease value of the asset. – it is the reduction in the value of assets due to its usage over the period of time.
- Sundry debtors : The person who is the receiver or customer
- Sundry creditors : The person who gives or supplier.