Introduction Basic of Accounting

"Modern Accounting is the language of business.”

A businessman invests capital in a business with the objective of making profits and increasing his resources. He incurs various expenses like salaries, rent, power and stationery to operate his business. He receives income from different sources like commission, interest and discount in the course of his business operations. He buys and sells goods or services on cash or credit basis. He acquires and disposes of properties and assets such as land and building, plant and machinery and furniture and fixtures for producing and selling goods and services to generate revenue. He borrows money from various sources like banks, financial institutions and private money-lenders for financing the business.

In effect, a business:

* Owns Assets such as land & building, plant & machinery and furniture & fixtures
* Owes Liabilities such as Capital (lent by business promoters), Loans & Borrowings raised from banks, financial institutions and the market

* Receives income from different sources sales (of goods), commission, interest and discount
* Incurs expenses towards purchase (of goods), salaries, rent, power and stationery


Effective management of business requires control over expenses to reduce the cost of operation and optimize the profitability of business. Assets must be properly maintained to increase their productivity. Liabilities have to be repaid in due time. Dealings with customers and suppliers have to be managed properly to keep them satisfied. In order to maintain assets in good condition, to repay debts and other liabilities in time, to reduce the expenses and to increase income from sales and other sources, the businessman requires complete information about his business transactions at any point in time especially on:

* What it (his business) owns?
* What it owes?
* How much income it has earned?
* How much expenses it has incurred?
* What is the profit made?
* What his financial position is?


To help businessmen in finding the required information on the status of his business at any point in time, Accounting was developed. Financial Transactions relating to business are recorded in the form of accounting entries through generally accepted principles of accounting so that income and financial position may be stated fairly. Accounting is thus a device for recording, classifying and summarizing financial transactions and interpreting its results for evaluating financial performance of business by stake-holders-proprietors, managers, creditors and investors.

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