Introduction
Accounting is the process of recording, summarizing, and reporting a business’s
financial transactions.
In other words, it keeps track of where money comes from, where it goes, and how much
is left, so that people running the business (and others like investors, banks, or the
government) can understand its financial health.
Think of it like keeping a diary or notebook of all the money you earn and spend — just
done more formally and in a way everyone can understand.
Characteristics
(1) Financial characteristic:
Transactions or events which are recorded in accounting must be measurable in monetary value.
For example, 10,000 kg of chemical is purchased. The value of this purchase has to be determined in terms of money. This chemical is
purchased for ₹ 20,000, which means that 10,000 kg of chemical = ₹ 20,000. In exchange for the chemical, ₹ 20,000 are payable. Rupee is
money. Transactions made through money are known as economic transactions. This transaction has financial characteristics.
(2) Money as a medium of exchange:
Transactions or events recorded in accounting come into existence through the usage of money.
Money acts as an exchange and will be received by the seller for 10,000 kg of chemical sold. By using this money, the seller can purchase
any other product or service.
(3) Classification and analysis of transactions:
In accounting, different types of transactions are recorded. These transactions are made in cash form or non-cash form (also known as
credit transactions); these transactions are performed for any income, expenses, asset, or liability-based activity. These transactions are
classified and analyzed on the basis of their nature which is derived from debit-credit rules of accounting (which are discussed hereafter).
Due to the characteristic of classification and analysis, transactions of a prescribed time can be seen together in one place.
Example: What was the opening balance of assets? How many assets were purchased? How many assets were sold? What is the closing
balance of assets? The answers to all these questions are obtained because of classification and analysis.
Characteristics
(4) Interpretation of transactions:
In accounting, only accounts are not prepared. But after accounts are prepared as per the prescribed norms, they are
also interpreted on the basis of disclosed details and figures (which is called as quantitative information).
Example: When blood pressure of a person is measured and if it comes to 120-80, it indicates that the person is healthy
from the viewpoint of blood pressure. "120-80" is the measure of blood pressure, and the comment "healthy" is the
interpretation.
In accounting, interpretation can be done from the accounts prepared.
Example: Total Income is ₹ 20,000 and Total expense is ₹ 12,000; the difference of ₹ 8,000 is the excess of income
over expenses. This indicates that the person has benefited from this transaction. The difference of income and expense
is in the form of benefit, which is interpretation of these figures. In this manner, transactions recorded in accounting can
be interpreted, and their results can be understood.
(5) Quantitative information:
Information recorded in accounts is in the monetary form. So, this information is known as quantitative information.
(6) Economic decisions:
Different stakeholders take their decisions based on accounts prepared by accounting.
Examples:
Creditors make decisions to lend money to the company.
Potential shareholders make decisions to invest their funds.
The company itself makes decisions for its own development.
Characteristics
(7) Historical information:
In accounting, all past transactions and
events are recorded. These past transactions or events become history.
Past always discloses history.
Accounts prepared on the basis of history represent
historical information and results.
Thus, accounting has relation with historical information.
From the above characteristics, it is clear that
accounting is not just about recording financial transactions;
it is a complete and systematic process that
includes classifying, summarizing, interpreting, and
presenting information in monetary terms.
Types of Accounting Transactions
Types of Accounting Transactions
Economic Transactions Non-Economic Transactions
Cash Credit exchange transactions
❖ Economic Transactions
These are transactions that have a direct monetary impact on the financial statements of a business.
They are recorded in the books of accounts because they involve the movement or change of money or money’s
worth.
❖ Non-Economic Transactions
These transactions do not have any direct monetary impact and therefore are not recorded in the books of
accounts.
Terminology of Accounting
1. Transaction:
In accounting, a transaction is any business event that can be measured in money and affects the financial position. For
example, purchasing office furniture for ₹15,000 or selling goods worth ₹25,000 on credit are both transactions because
they involve a measurable financial change.
2. Account:
An account is a record where all transactions related to a particular item (like cash, rent, or sales) are collected. For
instance, all money paid and received in cash is recorded in the Cash Account.
3. Assets:
Assets are valuable resources owned by a business that provide future economic benefits. For example, land, buildings,
machinery, computers, and cash in hand are all assets of a business.
4. Liabilities:
Liabilities are the amounts the business owes to others. For example, a bank loan of ₹1,00,000 or ₹30,000 payable to
suppliers are liabilities because they create an obligation to pay.
5. Capital:
Capital is the money or resources the owner invests in the business. For example, if the owner starts the business by
investing ₹2,00,000, it becomes the business’s capital.
Terminology of Accounting
6. Drawings:
Drawings refer to the money or goods the owner takes out of the business for personal use. For instance, if the owner
withdraws ₹5,000 cash from the business for household expenses, it is called drawings.
7. Debtor:
A debtor is a person or entity that owes money to the business because they bought goods or services on credit. For
example, if the business sells goods worth ₹10,000 to Mr. Ravi on credit, Mr. Ravi becomes a debtor.
8. Creditor:
A creditor is a person or entity to whom the business owes money. For instance, if goods are bought worth ₹8,000 on credit
from M/s Gupta Traders, then M/s Gupta Traders become a creditor.
9. Revenue / Income:
Revenue or income is the money the business earns from its main activities or other sources. For example, earning ₹50,000
from selling products or receiving ₹1,000 as interest from the bank.
10. Expense:
Expenses are the costs incurred to run the business and earn income. For instance, paying ₹3,000 as electricity charges or
₹7,000 as salaries to employees are expenses.
Terminology of Accounting
11. Depreciation:
Depreciation is the reduction in the value of fixed assets due to usage and time. For example, charging ₹5,000 as
depreciation on machinery each year.
12. Capital Receipts
Receipts which are non-recurring in nature, not earned through the regular business operations, and either create a
liability or reduce an asset.
13. Revenue Receipts
Receipts that are regular and recurring in nature, earned through normal business activities, and do not create a liability or
reduce an asset.
14. Capital Expenditure
Expenses incurred to acquire, upgrade, or extend the life of a fixed asset; they provide benefits for more than one
accounting period.
15.evenue Expenditure
Expenses incurred in the day-to-day running of the business, which benefit only the current accounting period.
Terminology of Accounting
16. Purchases
In accounting, purchases refer to the total cost of goods or materials bought by a business primarily for resale or for use in
production. Purchases can be made in cash (immediate payment) or on credit (payment deferred to a future date). For
example, if a trader buys 100 shirts worth ₹40,000 from a supplier to sell in their shop, this amount is recorded as purchases.
Purchases form part of the trading account and help calculate the cost of goods sold.
17. Sales
Sales refer to the total amount received or receivable from selling goods or services to customers in the ordinary course of
business. Like purchases, sales can also be made in cash or on credit. For example, selling shirts worth ₹60,000 to
customers — whether they pay immediately or later — is recorded as sales. Sales generate revenue, which is shown on the
credit side of the trading account, contributing to the calculation of gross profit.
18. Bad Debts
Bad debts arise when amounts owed to the business by debtors (customers who bought goods on credit) are no longer
recoverable, usually because the customer becomes insolvent or refuses to pay. For example, if a customer who owes
₹5,000 cannot pay due to bankruptcy, this ₹5,000 is treated as bad debts. Bad debts are an expense and are shown on the
debit side of the profit & loss account, as they reduce the net profit.
Describe whether the following transactions are economic or non-economic transactions and clarify the reason for it.
(1) Assets purchased for ₹10,000
(2) Assets purchased from Radha for ₹12,000 on credit
(3) Asset sold for ₹20,000
(4) Assets sold to Mira on credit for ₹22,000
(5) ₹8,000 paid for wages
(6) ₹9,000 received for rent
(7) Liability of ₹15,000 is settled
(8) Receivable of ₹18,000 is received
(9) An order is received to supply goods of ₹10,000
(10) A planning is made to buy one asset
(11) To enhance sales, for discussion, a meeting is arranged with salesmen.
Identification of Cash and Credit Transaction
(1) Cash Transaction: In this kind of transaction
(i) There is an exchange through cash or bank.
(ii) In such transaction the word cash is mentioned. If the word cash is not mentioned and the name of a person is not
mentioned, then also it is treated as a cash transaction.
(iii) In this transaction bank/cash account is definitely affected and consequently bank/cash increases and/or decreases.
Credit Transaction: In this kind of transaction
(i) No exchange through cash / bank
(ii) There is emergence of relation of debtor and creditor
(iii) Name of the person is mentioned. The word cash/bank is not mentioned.
(iv) It definitely affects the account of a person.
Describe whether the following transactions are cash or credit and explain the reasons for it:
(1) Goods sold in cash for ₹500.
(2) Goods purchased for ₹800.
(3) Goods of ₹900 sold to Mina.
(4) Goods of ₹2,000 sold to Nutan for cash.
(5) Salary paid ₹5,000.
(6) Insurance premium paid ₹8,000.
(7) Goods of ₹200 received as a free sample.
(8) Furniture of ₹5,000 purchased from Shreeji Furniture.
(9) ₹3,000 paid to Shah Agency for advertisement.
(10) Commission received ₹3,200.
(11) Goods of ₹5,000 purchased for cash, payment is made by cheque.
(12) Goods of ₹6,000 sold, payment is received by cheque.
(13) Rent received by cheque ₹500.
12) Goods of ₹6,000 sold, payment is received by cheque.
(13) Rent received by cheque ₹500.
(14) Telephone bill of ₹700, paid by cheque.
(15) A cheque of ₹3,000 issued to Laxmiben for her dues.
Types of Accounts
Classify the following accounts and give explanation in brief:
(1) Navjivan Commerce College Account
(2) Drawings account
(3) Cash account
(4) Donation account
(5) Machinery account
(6) Land account
(7) Raj Medical Stores account
(8) Salary account
(9) Carriage inward account
(10) Furniture account
(11) Carriage outward account
(12) Stationery account
(13) Wages account
(14) Copyright account
(15) Interest received account
Types of Accounts
(16) Union Bank account
(17) Rent paid account
(18) Reliance shares account
(19) Discount received account
(20) Ahmedabad Branch account
(21) Bad debts account
(22) Karnavati club account
(23) Debtors account
(24) Goods distributed as sample account
(25) Creditors account
(26) Factory expense account
(27) Nilamben’s account
(28) Depreciation account
(29) Gujarat Government account
(30) Received bank interest account
Types of Accounts
(31) Goods given for advertisement account
(32) Dividend received account
(33) Commission received account
(34) Goodwill account
(35) Commission allowed account
(36) Bills receivable account
(37) Discount allowed account
(38) Stock account
(39) Capital account
(40) Purchase account
Types of Accounts
(31) Goods given for advertisement account
(32) Dividend received account
(33) Commission received account
(34) Goodwill account
(35) Commission allowed account
(36) Bills receivable account
(37) Discount allowed account
(38) Stock account
(39) Capital account
(40) Purchase account
Rules for Debit and Credit
