Financial Accounting — Complete Basic Notes

Financial Accounting — Basic Concepts

Accounting — Definition

Systematic process of recording, classifying, summarizing, and interpreting financial transactions.

Basic Accounting Equation

Assets = Liabilities + Capital (Owner's Equity)

Example:

Types of Accounts

Personal Accounts

Accounts of persons, firms, companies
Rule: Debit the receiver, Credit the giver
Example: Ramesh's A/c, State Bank A/c

Real Accounts

Tangible (furniture, cash, building) and intangible (goodwill, patent) assets
Rule: Debit what comes in, Credit what goes out
Example: Cash A/c, Furniture A/c

Nominal Accounts

Income, expenses, losses, gains
Rule: Debit all expenses/losses, Credit all incomes/gains
Example: Salary A/c, Sales A/c, Rent A/c

Journal Entry Format

``
Date | Particulars | L.F. | Dr. (₹) | Cr. (₹)
--------|-------------------|------|---------|--------
1 Jan | Cash A/c Dr. | | 50,000 |
| To Capital A/c | | | 50,000
| (Started business with cash)
`

Ledger

Book where journal entries are transferred (posted) — T-format accounts

Trial Balance

List of all ledger account balances — checks arithmetic accuracy

• Total of Dr. balances = Total of Cr. balances

Final Accounts

1. Trading Account — Gross Profit/Loss

- Debit: Opening Stock, Purchases, Direct Expenses
- Credit: Sales, Closing Stock

2. Profit & Loss Account — Net Profit/Loss

- Debit: Indirect Expenses (salary, rent, depreciation)
- Credit: Gross Profit, Indirect Incomes

3. Balance Sheet — Financial position

- Liabilities side: Capital, Long-term liabilities, Current liabilities
- Assets side: Fixed assets, Current assets

Important Formulas

`
Gross Profit = Net Sales - Cost of Goods Sold
Cost of Goods Sold = Opening Stock + Purchases - Closing Stock
Net Profit = Gross Profit - Indirect Expenses + Indirect Incomes
Current Ratio = Current Assets / Current Liabilities (ideal: 2:1)
``

Golden Rules Summary

PYQ

Q: Journalize the following transactions and post to ledger.
Q: Prepare Trading & P&L account from given Trial Balance.
Q: What is depreciation? Explain SLM and WDV methods.