ACCOUNTING BASICS

Definition of Accounting
Accounting is the systematic process of recording, classifying, summarizing, analyzing, and interpreting financial
transactions and communicating the results to users like investors, creditors, and management.

🔍 Example: If a company buys a computer for ₹50,000, accounting records the purchase, categorizes it as an asset,
and includes it in financial reports.

Objectives of Accounting

Objective Description
Recording Transactions Maintain permanent, systematic records of financial events.
Classifying Transactions Group transactions under appropriate categories (e.g., salaries, rent).
Summarizing Prepare financial statements like the Balance Sheet and Profit & Loss A/c.
Analyzing and Interpreting Understand financial results and make informed decisions.
Communicating Information Share financial data with stakeholders.

Basic Terms in Accounting

Term Explanation
Transaction Any financial activity like buying or selling.
Capital Money invested by the owner in the business.
Drawings Money or goods withdrawn by the owner for personal use.
Assets What the business owns (e.g., cash, furniture, building).
Liabilities What the business owes (e.g., loans, creditors).
Revenue/Income Earnings from sales or services.
Expenses Costs incurred (e.g., rent, salary, electricity).
Profit/Loss Difference between income and expenses.

Types of Accounts
Accounting follows the Golden Rules of Accounting based on the nature of accounts:

Type of Account Description Golden Rule

Type of Account Description Golden Rule
Personal
Accounts related to persons or organizations Debit the receiver, Credit the giver
Account
Real Account Accounts of assets and properties Debit what comes in, Credit what goes out
Nominal Accounts of income, expenses, profits, and Debit all expenses/losses, Credit all
Account losses incomes/gains

📌 Example:

 Rent paid → Rent A/c (Nominal) is debited

 Cash received from Mr. A → Mr. A’s A/c (Personal) is credited, Cash A/c (Real) is debited

The Accounting Process (Cycle)

Below is a step-by-step process followed in accounting:

1. Identifying Transactions – Recognize business activities with a financial impact.

2. Recording in Journal – Enter each transaction in chronological order (Journal Entries).
3. Posting to Ledger – Transfer journal entries to respective ledger accounts.
4. Trial Balance – A list to ensure total debits = total credits.
5. Final Accounts – Prepare Profit & Loss Account and Balance Sheet.

🔄 Accounting Cycle Diagram

Transaction → Journal → Ledger → Trial Balance → Final Accounts → Analysis

Double Entry System of Accounting

The Double Entry System states that every transaction affects two accounts – one is debited and the other credited.

💡 Rule: For every debit, there is a corresponding credit of equal amount.

🔁 Example of a Double Entry

Transaction Debit Credit

Bought machinery ₹20,000 Machinery A/c Cash A/c

Importance of Accounting

Reason Explanation
Helps in financial planning Business can plan expenses and income better.
Tracks performance Know profits, losses, and trends.
Legal compliance Fulfills legal/tax requirements.
 Reason Explanation
Aids in decision-making Data helps in taking strategic business decisions.
Useful for stakeholders Investors, banks, and authorities use financial reports.

Real-World Example
A small retail shop uses accounting to:

 Record daily sales

 Pay rent, salaries, and utility bills
 Track profits monthly
 File taxes using financial statements

Summary Table: Key Concepts

Concept Description
Transaction Any exchange of value
Journal Book of original entry
Ledger Book of classified accounts
Trial Balance A list of all accounts with balances
Profit & Loss A/c Shows net profit or loss
Balance Sheet Shows financial position (assets = liabilities + capital)

INTRODUCTION TO ACCOUNTING PRINCIPLES

(Including: Journal Entries, Ledgers, Trial Balance, Final Accounts)

1. What is Accounting?
Definition:
Accounting is the systematic process of recording, classifying, summarizing, and interpreting financial transactions
to provide useful information for decision-making.

Example: A grocery store records its daily sales, expenses, and profits to monitor performance and file taxes.

2. Basic Accounting Principles

Accounting operates on certain universally accepted principles known as Generally Accepted Accounting
Principles (GAAP).

Key Principles:

Principle Description

Accrual Principle Tra ns actions are recorded when they occur, not when cash is received/paid.

Consistency Principle Sa me accounting methods should be used consistently.

Going Concern Principle Bus iness is assumed to continue operating in the foreseeable future.

Matching Principle Expenses are matched with related revenues in the same period.

Cost Principle As s ets are recorded at their original cost.

Full Disclosure Al l i mportant i nformation s hould be disclosed i n financial statements.

3. Journal Entries
Definition:

A journal is the first place where all business transactions are recorded in chronological order.

Journal Entry Format:

Date Particulars L.F. Debit (₹) Credit (₹)

01-Apr-24 Ca s h A/c Dr. 101 10,000

To Ca pi tal A/c 102 10,000

(Bei ng cash i ntroduced in business)

Rules of Debit and Credit:

Type of Account Debit (Dr.) Credit (Cr.)

Assets Increase Decrease

Liabilities Decrease Increase

Capital Decrease Increase

 Type of Account Debit (Dr.) Credit (Cr.)

Income Decrease Increase

Expenses Increase Decrease

Example: Purchased furniture for ₹5,000 in cash:

Journal Entry: Furniture A/c Dr. ₹5,000
→ To Cash A/c ₹5,000

4. Ledger
Definition:

A ledger is a book where all journal entries are transferred account-wise. It is also known as the book of final
entry.

Ledger Format:

Date Particulars J.F. Debit (₹) Credit (₹)

01-Apr-24 To Ca pi tal A/c 001 10,000

10-Apr-24 By Furni ture A/c 002 5,000

Purpose: To find the balance of each account (e.g., cash, sales, expenses).

5. Trial Balance
Definition:

A Trial Balance is a statement that shows the total debit and credit balances of all ledger accounts on a specific
date.

Trial Balance Format:

Account Name Debit (₹) Credit (₹)

Ca s h A/c 5,000

Ca pi tal A/c 10,000

 Account Name Debit (₹) Credit (₹)

Furni ture A/c 5,000

Total 10,000 10,000

Purpose: To check the arithmetical accuracy of ledger entries.

Note: If the total of debit = credit, records are assumed accurate.

6. Final Accounts
Definition:

Final Accounts are prepared at the end of the accounting period to know the financial results and position of the
business.

Components:

A. Trading Account

 Purpose: To find Gross Profit or Loss.

 Formula:
Gross Profit = Sales – (Opening Stock + Purchases + Direct Expenses)

B. Profit and Loss Account

 Purpose: To calculate Net Profit or Loss.

 Formula:
Net Profit = Gross Profit – Indirect Expenses + Other Income

C. Balance Sheet

 Purpose: To show the financial position (Assets = Liabilities + Capital).

 Format:

Liabilities Amount (₹) Assets Amount (₹)

Ca pi tal 50,000 Ca s h 10,000

Credi tors 20,000 Furni ture 30,000

Stock 30,000

Total 70,000 Total 70,000

Flow of Accounting Process
Transaction → Journal Entry → Ledger → Trial Balance → Final Accounts

Real-World Example:
Example: Small Retail Store

1. Owner invests ₹50,000 — Capital A/c credited, Cash A/c debited.

2. Store purchases goods — Purchases A/c debited, Cash A/c credited.
3. Sells goods — Cash A/c debited, Sales A/c credited.
4. At month-end — Prepare Trial Balance, P&L Account, and Balance Sheet.

TALLY INTERFACE AND NAVIGATION

Introduction to Tally
Tally is a powerful accounting software used for recording, processing, and managing business transactions. It is
widely used in small to medium enterprises for bookkeeping, inventory management, taxation, and payroll
processing.

Understanding the User Interface (UI)

2.1 Launching Tally

When you open Tally Prime (or Tally.ERP 9), the Gateway of Tally is the first screen you see. It serves as the
central dashboard from where all operations are accessed.

2.2 Key Components of the Tally UI

Component Description

Title Bar Di s plays software name a nd version.

Menu Bar Shows menu options like File, Company, Display, Reports, etc.

Gateway of Tally Centra l hub to a ccess va rious features like Ma sters, Tra nsactions, Reports.

Button Panel Shortcut buttons (F1: Help, F2: Date, F3: Company, etc.).

Info Panel Di s plays details like current company, date, a nd financial year.
 Component Description

Work Area Di s plays input s creens for vouchers, masters, or reports.

2.3 Navigation Keys in Tally

Function Shortcut Key

To s elect a company F1

To cha nge the date F2

To cha nge the period Al t + F2

To qui t Tally Ctrl + Q or Esc

To crea te a l edger Al t + C

Tip: Tally uses keyboard shortcuts extensively to enhance speed and productivity.

Data Entry and Modifications

3.1 Data Entry in Tally

Data entry in Tally is done using Vouchers. A voucher is a document that records a transaction.

Examples of vouchers:

 Payment Voucher – Records payments made.

 Receipt Voucher – Records money received.
 Sales Voucher – Records sale of goods or services.
 Purchase Voucher – Records purchase of goods or services.
 Journal Voucher – Records adjustments or non-cash transactions.

3.2 Modifying Existing Entries

To alter or delete any entry:

 Navigate to: Gateway of Tally → Display More Reports → Daybook

 Select the transaction → Press Enter
 Press Ctrl + A to save changes or Alt + D to delete.

Real-World Example: If you wrongly entered ₹5,000 as ₹50,000 in a payment voucher, you can easily edit it
through the Daybook screen.
Master Creation in Tally
4.1 What is a Master?

A Master is a template or definition used for repeated transactions in Tally.

Types of Masters:

1. Company Master
2. Account Masters (Ledgers, Groups)
3. Inventory Masters (Stock Items, Units, Godowns)

4.2 Company Creation

Steps to Create a Company

Gateway of Tally → Create Company

Field Description

Compa ny Name Na me of the organization

Ma i ling Address Offi ci al a ddress of the company

Fi nancial Year Sta rt da te of the financial year

Books Beginning Date When the books of accounts a re to start

Ba s e Currency Defa ult currency used (e.g., INR)

✅ Tip: One Tally installation can manage multiple companies.

4.3 Account Masters

(a) Groups

Groups categorize ledgers under common heads.

Predefined Group Examples Type

Ca pi tal Account Ca pi tal Group

 Predefined Group Examples Type

Current As sets As s et Group

Sa l es Account Income Group

Purcha s e Account Expense Group

Why Groups? They help in generating structured reports and summarizing ledger balances.

(b) Ledgers

A Ledger is an individual account used to record transactions.

Creating a Ledger:

Gateway of Tally → Accounts Info → Ledgers → Create

Field Example

Ledger Name Ca s h A/c

Under Group Ca s h-in-Hand

Opening Balance ₹10,000

Example: “Ram Traders” (a creditor) is created under Sundry Creditors group.

4.4 Inventory Masters

If a business deals with goods, inventory masters are essential.

(a) Stock Groups

Used to classify similar types of products.

Example:

 Electronics → Mobile, Laptop

 Groceries → Rice, Pulses

(b) Stock Items

Represents individual products.

Example:

 iPhone 14, Samsung Galaxy

(c) Units of Measurement

Defines units like Nos., Kg, Litres, etc.

(d) Godowns (Storage Locations)

Used to track inventory at different locations.

Inventory details help in stock management, valuation, and reorder level monitoring.

Diagram: Tally Interface Overview

+------------------------------+
| Title Bar |
+------------------------------+
| Menu Bar |
+------------------------------+
| Gateway of Tally |
| - Masters |
| - Vouchers |
| - Reports |
+------------------------------+
| Button Panel |
| [F1] [F2] [Alt+C] [Esc] |
+------------------------------+
| Work Area |
| (Data Entry, Reports, etc.) |
+------------------------------+
| Info Panel |
+------------------------------+

Real-World Applications of Master Setup in Tally

Business Type Masters Used

Grocery Store Stock Groups, Stock Items, Units, Cash & Sales Ledgers

IT Servi ces Company Servi ce Ledgers, Sundry Debtors, Sundry Creditors

Ma nufacturing Unit Godowns, Stock Items, Raw Ma terial Groups, Production Vouchers

Summary
 Topic Key Points

Ta l ly UI Ga teway of Tally, Menu Bar, Info Pa nel, Shortcuts

Da ta Entry Done through Vouchers; editable through Daybook

Ma s ters Templates like Company, Ledgers, Stock Items, Units

Na vi gation Keyboa rd shortcuts improve s peed a nd a ccuracy

Rea l-World Use Hel ps i n efficient record-keeping, inventory control, and financial reporting