Lesson
Accounting is the language of business. It helps us record, understand, and explain money-related activities.
Understand what accounting means and why businesses record transactions.
Concept explanation
Accounting means recording business transactions in a proper way so that we can know what happened in the business.
If a shopkeeper buys goods, sells goods, pays rent, receives cash, or takes a loan, all these activities affect the business.
Accounting helps record these activities clearly.
Accounting is not just maths. It is a system for understanding money movement in a business.
A business does many money-related activities every day.
Without accounting, the owner may forget what was bought, sold, paid, received, borrowed, or owed.
Accounting helps the owner know cash, goods, expenses, income, profit, loss, and business position.
A transaction is a business activity that can be measured in money.
Started business with cash Rs.50,000, bought goods for cash Rs.10,000, sold goods for Rs.5,000, paid rent Rs.2,000, and took loan from bank Rs.20,000 are transactions.
A plan to buy goods next month, a customer asking the price, or the shopkeeper thinking sales may increase are not recorded yet.
These are not recorded because no money-measurable business event has happened yet.
Imagine Raju starts a small stationery shop.
Day 1: He brings Rs.50,000 cash into the business.
Day 2: He buys notebooks for Rs.10,000.
Day 3: He sells notebooks for Rs.3,000.
Day 4: He pays shop rent Rs.2,000.
How will Raju know how much cash is left, how much goods he bought, how much he sold, whether the business is earning or losing, and what belongs to the business?
He needs accounting.
Money coming into business.
Money going out of business.
Goods bought and sold.
Amount payable to others.
Amount receivable from customers.
Assets owned by business.
Expenses and incomes.
Profit or loss.
Owners use it to know profit, loss, cash, and business position.
Students use it to understand how business transactions are recorded.
Banks use it to know whether the business can repay loans.
Government uses it for tax and legal reporting.
Investors use it to decide whether the business is strong.
Managers use it to make better decisions.
Business: an activity done to earn profit.
Transaction: a money-measurable business activity.
Capital: money or assets brought into the business by the owner.
Asset: something valuable owned by the business, such as cash, bank, furniture, machinery, and debtors.
Liability: amount the business has to pay to others, such as loans, creditors, and outstanding expenses.
Income: money earned by the business, such as sales, commission received, and interest received.
Expense: money spent to run the business, such as rent, salary, wages, and electricity.
Profit: when income is more than expenses.
Loss: when expenses are more than income.
Visual flow
Business activity
Transaction
Record in books
Classify into accounts
Prepare summary
Understand profit/loss and position
Solved examples
Example 1
Accounting records: Cash increased. Capital increased.
This is a transaction because cash came into business.
The owner introduced capital into the business.
Example 2
Accounting records: Purchases increased. Cash decreased.
This is a transaction because goods were bought.
Cash went out of the business.
Example 3
Accounting records: Rent expense increased. Cash decreased.
This is a transaction because the business paid an expense.
Cash went out of the business.
Example 4
Accounting records: Cash increased. Sales increased.
This is a transaction because the business earned sales.
The business received cash.
Avoid these
Practice prompts
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Now that you know what accounting records, learn why accounting follows common rules.
Continue to Theory Base of Accounting