Unit 1: Basic accounting concepts
Basic Accounting notes · PTU syllabus (BSIT405/BSBC305)
On this page
- Unit summary
- Background of accounting
- Meaning, importance and scope
- Basic accounting terms
- Types and classification of accounts
- The accounting equation
- The double entry system
- Rules of debit and credit
- Generally Accepted Accounting Principles (GAAP)
- Accounting concepts and conventions in detail
- Key terms
- Quick revision
- Important questions
Unit summary
Accounting records and reports the financial life of a business, and IT professionals increasingly build and support the systems that do it. This unit covers the background, importance and scope of accounting, the types and classification of accounts, basic terms, the accounting equation, the double entry system and generally accepted accounting principles.
After this unit you can
- Explain the background, importance and scope of accounting
- Classify accounts and explain basic terms
- Apply the accounting equation and the double entry system
- Explain GAAP
PTU syllabus topics
- Background
- importance and scope of accounting
- types and classification of accounts
- basic terms (capital, income, expenditure, assets, liabilities)
- accounting equation
- double entry system
- generally accepted accounting principles
- Personal account
- Debit the receiver, credit the giver
- Real account
- Debit what comes in, credit what goes out
- Nominal account
- Debit expenses and losses, credit incomes and gains
- Accounting equation
- Assets = Liabilities + Capital
Topic 1
Background of accounting
- Records of trade go back to ancient Mesopotamia, Egypt and India — Kautilya's Arthashastra describes the keeping of accounts.
- Luca Pacioli described the double entry system in 1494 (Summa de Arithmetica) and is called the father of accounting; traditional Indian businesses used the bahi-khata system.
- With joint stock companies, taxation and stock markets, accounting became regulated — today by the Companies Act, 2013, ICAI standards and Ind AS, and it is mostly computerised.
Topic 2
Meaning, importance and scope
Accounting is the art of recording, classifying and summarising financial transactions in money terms and interpreting the results (AICPA definition). Book-keeping is the recording part only — the clerical first stage of accounting. Objectives: keep systematic records, find profit or loss, show financial position, help decisions, and meet legal requirements.
- Systematic records
- Replaces memory with reliable books
- Profit or loss
- Shows the result of operations
- Financial position
- Shows assets and liabilities
- Decision-making
- Pricing, cost control, expansion
- Legal and tax compliance
- Income tax, GST and company law returns
- Evidence
- Records accepted in courts and by lenders
- Scope: financial accounting, cost accounting, management accounting, tax accounting, auditing, forensic accounting and accounting information systems (ERP).
Topic 3
Basic accounting terms
| Term | Meaning |
|---|---|
| Capital | Money invested by the owner |
| Drawings | Money or goods taken by the owner for personal use |
| Assets | Resources owned (fixed: building; current: stock, debtors, cash) |
| Liabilities | Amounts owed to outsiders (creditors, loans) |
| Revenue / Income | Earnings from sales and services |
| Expenses | Costs incurred to earn revenue |
| Debtors / Creditors | Those who owe us / those we owe |
| Goods | Items bought for resale |
- Income vs expenditure: income is the increase in wealth from business activity (sales, commission received); expenditure is money spent — revenue expenditure (salary, rent) benefits one year, capital expenditure (machinery) benefits several years.
Topic 4
Types and classification of accounts
Personal
Natural (Ramesh), artificial (SBI, a company), representative (outstanding salary)
Real
Tangible (cash, building, stock), intangible (goodwill, patents)
Nominal
Expenses, losses, incomes and gains (rent, wages, commission received)
- Modern classification: assets, liabilities, capital, revenue (income) and expenses.
Topic 5
The accounting equation
Assets = Liabilities + Capital. Every transaction keeps the equation balanced.
| Transaction | Assets | Liabilities | Capital |
|---|---|---|---|
| Started business with cash ₹1,00,000 | +1,00,000 (cash) | — | +1,00,000 |
| Bought goods on credit ₹20,000 | +20,000 (stock) | +20,000 (creditors) | — |
| Sold goods costing ₹10,000 for ₹15,000 cash | +15,000 cash, −10,000 stock | — | +5,000 (profit) |
Topic 6
The double entry system
- Double entry: every transaction has two aspects — a debit to one account and an equal credit to another — so total debits always equal total credits.
- Two aspects
- Every debit has an equal credit
- Complete record
- Both personal and impersonal accounts kept
- Arithmetical check
- Trial balance can be prepared
- Profit and position
- Final accounts can be drawn up
- Fraud control
- Errors and frauds easier to detect
Topic 7
Rules of debit and credit
- Personal account
- Debit the receiver, credit the giver
- Real account
- Debit what comes in, credit what goes out
- Nominal account
- Debit all expenses and losses, credit all incomes and gains
Modern (accounting equation) approach: increase in assets and expenses → debit; increase in liabilities, capital and revenue → credit.
Topic 8
Generally Accepted Accounting Principles (GAAP)
GAAP are the common set of rules, concepts and conventions used for preparing financial statements so that they are consistent and comparable.
Business entity
Business is separate from the owner
Money measurement
Only transactions measurable in money are recorded
Going concern
Business will continue indefinitely
Accounting period
Life divided into periods (usually one year)
Cost concept
Assets recorded at cost
Dual aspect
Every transaction has two effects
Matching
Expenses matched with revenues of the period
Accrual
Recorded when earned or incurred, not when cash moves
Realisation
Revenue recognised when earned
Conventions
Consistency, full disclosure, conservatism (prudence), materiality
- In India, Accounting Standards (AS) issued by ICAI and Ind AS (converged with IFRS) for specified companies give GAAP a formal shape.
Topic 9
Accounting concepts and conventions in detail
Examples
Business entity, money measurement, going concern, accounting period, cost, dual aspect, realisation, accrual, matching
Consistency, conservatism (prudence), materiality, full disclosure
- Dual aspect: every transaction has two effects — the basis of Assets = Liabilities + Capital.
- Going concern: the business will continue for the foreseeable future.
- Conservatism: anticipate no profit, but provide for all possible losses.
- Matching: expenses are matched with the revenue of the same period.
Key terms
- Accounting
- Recording, classifying, summarising and interpreting financial transactions
- Personal account
- Account of a person, firm or institution
- Nominal account
- Account of an expense, loss, income or gain
- Double entry
- System recording both aspects of each transaction
- GAAP
- Generally accepted rules for preparing financial statements
Quick revision
- Pacioli (1494); bahi-khata; modern regulation.
- Importance and scope of accounting.
- Capital, income, expenditure, assets, liabilities.
- Personal, real, nominal accounts; golden rules.
- Assets = Liabilities + Capital; double entry; GAAP concepts and conventions.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.Who is called the father of accounting?
- Q2.State two objectives of accounting.
- Q3.Distinguish capital and revenue expenditure.
- Q4.Give one example each of personal, real and nominal accounts.
- Q5.What is the dual aspect concept?
- Q6.What is GAAP?
Long-answer questions
- Q1.Explain the importance and scope of accounting.
- Q2.Explain the classification of accounts with the rules of debit and credit.
- Q3.Explain the double entry system and its advantages.
- Q4.Explain the generally accepted accounting principles.
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