INTRODUCTION

TO BASIC
ACCOUNTING
FOR Beginners and Non Accounting Professionals

- A PUBLICATION OF COMPANY XYZ -

3 AUDIOBOOK COLLECTIONS

6 BOOK COLLECTIONS
 TABLE OF CONTENTS

1. Intro

2. What is accounting

3. Career opportunity in finance

4. Accounting principles as per GAAP

5. Accounting equation

6. Double entry system

7. Accounting cycle

8. Financial statements

9. Bonus Offer
INTRODUCTION
 Hi,

Accounting is pictured as boring subject for many years. When

you are seeing someone learning accounting, you will think what
will be his future or why is he wasting his time?

But that person is clever.

In day to day life, accounting and finance is applicable in each

transaction. It is starting from buying a shirt to purchasing your
bungalow. You need to learn accounting to understand how
business works, where is your salary going or whether your
business is actually making profit or whether your investment is
debt or asset? Via learning accounting, you not only understand
more about money but also impress your boss or friends with
your knowledge

In this book, you will become familiar with basic accounting and
learn about principles of accounting, accounting cycle and
financial statements.
Before you start reading this book, I invite you to join my udemy
course ( worth 59$) on basic accounting at 99% discount at $1 .
Join here.

Thanks, Tarannum
What is accounting?
Accounting is system of financial reporting that identifies , records and
communicate transactions and result of business.

Three important elements of accounting are

1. Identification: In account, first accountant is needed to identify

the transaction and decide whether it should be recorded or not.
He applies accounting principles in this process.

2. Recording: After that, he records the transaction as per double

entry system or accounting equation and following accounting cycle
process.
Communication: Finally, financial statements are
prepared from accounts and the result of business and
position of assets and liabilities are communicated to
stakeholders and management.

Through accounting, we can know result of business.

Accounting is tool to measure result of business and leads to
future plans.

Can you imagine Amazon without accounts? How can it

measure sales without account management? How can it
design growth strategy without accounts? How can it publish
revenue and income reports to its stakeholders without
maintaining accounts?

Account is simple but necessity in each business. From small

proprietor to global enterprise, Accounting is must.

That’s why it is necessary that each should get basic

accounting knowledge to understand and do financial
transactions smoothly in day to day life.
Career in accounting
Another side of learning accounting is make serious career in finance.
Many consider finance as boring and time consuming activity but
they are wrong. Finance has bright career opportunity if you consider
and work in this career line with interest.
Here is opportunity of finance person in following sectors:

Commercial banking
Corporate finance
Insurance
Money management
real estate
With finance knowledge, a person can work as

Tax advisor
Financial adviser
Finance manager
Internal auditor
Investment analyst
Retail banker
Corporate treasure
Chartered Accountant ( CPA)
Tax Investor
Actuary
Accounting technician
Business person
Manufacturer

If you select job as your career, Annual salary of finance

profession is ranging from $70000 to $150000
average. You can earn more than triple if you start your
own business in finance field. You can also use your finance
skill in managing your business and increase profitability.

So learning finance is win- win situation for every

person.
How Accounting works?
Financial transactions are recorded in four major accounting
cycles:

Revenue cycle
Purchase
Payroll
General journal

We can elaborate various major cycles as per under:

Revenue cycle: In this cycle, order entries , cash receipts

and account receivables are covered.

Purchase cycle: In this cycle, Purchase orders/

purchases, cash expenses or cheque and account payables
are covered.

Payroll cycle: In this cycle, all the data regarding

employees payroll (Employees salary) is recorded.
GAAP Principles
There are some basic accounting principles accepted by
GAAP (Generally accepted accounting principles).
Accounting is based on this principles and violation of those
principles leads to inaccurate result of business.

Here is brief overview of accounting principles as per GAAP:

Cost principles:
It means that assets of business are required to be recorded
at cost value. Example: Cost of land is $100000 but market
value of land is $400000. In this situation, we will record
land at $100000 in financial statements.

Monetary unit assumption:

It means transactions which can be measured in money are
only recorded in accounts. Example: efficiency of employees
are useful in growth of business but it can't be measured in
money. So it will not be included in accounting. Other
assumption is that inflation is ignored in accounting.

Economy entity assumption:

As per this principle, owner of business and business should
be considered as separate entity. That's why capital invested
by proprietor or partner is shown as internal liability.
Time period assumption:
As per this assumption, accounts are written for specific time
period. (One year). Year can be start from January or from
April.

Matching concept:
As per this principle, revenue should be matched with
expenses. Example: Business sale for quarter is $200000.
We will consider expense incurred to earn that revenue while
calculating profit for that quarter. It is not relevant that
expenses are paid or payable. This is called matching
concept.

Going concern Principle:

As per this principle, it is assumed that there is no intention
of winding up of business and business will be continued for
long period.

Conservatism:
As per this principle, expected future income or gain should
not be recognized but estimated future losses or expenses
should be recognized in accounting.
Accounting Equation
Accounting equation is formula representing three factors:
Asset , liability and capital.

Assets - Liability = CAPITAL.

Accounting equation is always remained in balance for each

transaction of business.

Before understanding accounting equation, first we need to

understand what is assets, liability and capital?

Assets: assets are property of business like land, building,

furniture, machinery, plot, debtors, stock , cash, bank etc.
Through asset, business will gain any future benefit or gain.

Liability: liability is debt of business like creditors, loans from

bank, outstanding expenses etc.
Capital: Capital is owner's equity or investment in business.
Revenue: Revenue is income of business and it will increase
capital.

Expenses: Expenses are day to day cost of running business.

When we reduce liability from asset, it will be business capital.

We can understand it with following examples.

Example 1:

Xoya has started business with $500000. Now, let’s make

accounting equation for this transaction.

Xoya is owner of business so owner's equity is $500000. Other

side, as she started business with cash, cash balance is $500000.
So asset is $500000.

Equation is
$500000- 0 = $500000.

Example 2:

Xoya has sold service to peter at $5000. Peter has not paid yet.
In this transaction, Xoya has sold service so income will increase
by $5000. Similarly capital will be increased by $5000.

Other side, Debtor ( Peter) balance will be increased by $5000.

Equation is
$5000- 0 = $5000.
Example 3:

Xoya has paid $1000 as salary.

In this transaction, salary (Expense) will be increased which will
reduce the profit and capital by $1000. Other side cash will be
reduced by $1000.

Equation is
-$1000 - 0 = -$1000.

Accounting equation can be used to do journal entry or

understand transactions easily. Accounting equation is 100%
accurate and it never varies for any transaction.
What is double entry
system?
Accounting is maintained at double entry systems.

What is a double entry system?

As per double entry system, there is always two effects or two
accounts are involved in each transactions.

Examples:

Rozy purchase car by cheque. In this transaction, bank account is

reduced and car which is asset is increased. In this transaction,
two accounts are involved. Bank and Car.

Xen has paid cash to Lara. In this transaction, cash is reduced and
Lara which is our creditor is also reduced. There are two accounts
involved in this transaction. Lara and Cash.

Share purchased in XYZ ltd. In this transaction, two accounts are

involved bank and Shares in XYZ ltd. Investment account (Shares
in XYZ ltd) is increased and Bank account is reduced.

I hope now you are able to understand what double entry system
is. We can use this system to do journal entry or posting in
ledgers.
Accrual Accounting
There are two accounting methods:

Accrual accounting
Cash accounting

In cash accounting, transactions are recorded when cash

changes hand means when cash income or cash expenses are
done. Other side, in accrual accounting, transactions are recorded
when they incurred, no matter the transactions are cash
transactions or credit transactions.

Cash accounting is used in rare case but accrual accounting is

popular because it is showing actual result of business.

Due to accrual accounting, concept of prepayment, accruals are

needed to be understood.

Prepayment :
Prepayment means when we pay someone money in advance and
we do not receive goods or service yet. Example: prepaid
expenses.
Prepayments are shown on asset side of balance sheet.

Accruals:
Accrued expenses: Sometimes expenses are due but we have not
paid them yet. They are our liability and should be considered in
current financial year as expenses.

Accrued income:

Accrued income means we have provide service or sold goods but

have not received money for it yet. They are our accruals. They
are also need to be recorded in financial statements as current
income.
 Result as per Accruals accounting

Transactions $

Sale of goods

Cash received 5,00,000

Credit sale -debtor 1,20,000

6,20,000

Purchase of goods

Cash purchase 2,20,000

Credit purchase 1,00,000 3,20,000

10,000
selling exp paid

salary payable 10,000 20,000

Net profit 280000

 Result as per Cash accounting

Transactions $

Sale of goods

Cash received 5,00,000

Credit sale -debtor 1,20,000

5,00,000

Purchase of goods

Cash purchase 2,20,000

Credit purchase 1,00,000 2,20,000

10,000
selling exp paid

salary payable 10,000 10,000

Net profit 270000

Accounting Cycle
 Financial Journal
statements entries

Post
Ledger
closing trial
accounts
balance

Unadjusted
Closing
entries trial
balance

adjusted
Adjusting
trial
entries
balance
Accounting cycle is process starting from recording transactions to
closing books of accounts.

We can understand accounting cycle from above image.

First step is recording transactions in journal.

Second step is doing ledger entry from journal.

Third step is balancing ledger and preparation of trial balance.

Fourth step is doing adjusting entries.

Fifth step is preparation of adjusted trial balance.

Sixth step is preparation of profit and loss account and balance sheet
( preparation of financial statements)

Last step is doing closing entry and preparation of closing trial

balance.
Financial Statements
Financial statements consists three statements:

Income statement
Balance sheet
Cash flow statement (Not mandatory for all organization).

Income statement: Income statement is summary of all income

and gains during the year and all expenses and losses during the
year. If the company is manufacturing or dealing in purchase and
sale of goods, trading account is also prepared. From income
statement, we can find actual net profit of business.

We record all the income and expenses as per accrued accounting. So

record current years income (Received or not) and matching
expenses (Paid or payable) to prepare financial statements.

In next page, you can get access of income statement.

Profit and loss account for the year ended
….

Particulars $ Particulars $

Opening stock 2000 sales 940000

Purch Commission
ase 71000 received 4000

Administrative
exp 60000

Travelling exp 12000

Discount given 400

Salary 1000

Net profit 797600

944000 944000
Balance sheet: Balance sheet is statement showing assets and
liability position of business. It is prepared for last day of the
year. Balance sheet is useful to know about credit worthiness of
business.

Assets and liabilities are current and long term. Like current assets,
fixed assets, Long term loan.
Here is the balance sheet of XYZ ltd.

Liability $ Asset $

Capital Cash 532900

Mr. Smart
283000 Bank 209990
Drawing
10100 Jenny 20000
Profit Commission
491490 764390 receivable 2000
Insurance
paid in
advance 2000
Salary
payable 2500 Building 33000
Investment in
shares of LM
Creditors 32000 ltd 10000
Advance
received 10000
Provision
for taxes 1000

809890 809890
There is no mandatory requirement to prepare cash flow statements
for all enterprise. Cash flow statement represents cash inflow and
outflow during the year.
It represents cash movement of three activities:
Operational activities
Investing activities
Financial activities
here is cash flow statement of xyz ltd.

Particulars $ $
Cash Flow from operation
activity

Cash receipts 200000

Less Cash payment 120000 80000

Cash Flow from investing

activity

Sale of Plot 100000

Less Purchase of shares 20000 80000

Cash Flow from financial

activity

Share capital issued 100000

Less
Debentures 10000 90000
redeemed

Net increase in cash and

cash equivalent 250000

Opening balance of cash 10000

Closing balance of cash 260000

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