📌 Fundamentals of Accounting

Accounting is the process of recording, summarizing, analyzing, and reporting financial transactions of a business. It helps in making informed financial decisions.

1️⃣ Basic Accounting Principles

🔹 Accrual Principle – Revenues & expenses are recorded when they occur, not when cash is received/paid.
🔹 Matching Principle – Expenses should be recorded in the same period as the revenues they help generate.
🔹 Conservatism Principle – Record expected losses but do not anticipate gains.
🔹 Consistency Principle – Use the same accounting methods over time for accurate comparisons.
🔹 Going Concern Principle – Assume that the business will continue to operate unless stated otherwise.

2️⃣ Important Accounting Terms

📌 Assets – Resources owned by a business (Cash, Inventory, Property).
📌 Liabilities – Debts or obligations (Loans, Payables).
📌 Equity – Owner’s investment in the business.
📌 Revenue – Money earned from business activities.
📌 Expenses – Costs incurred to generate revenue.
📌 Profit (Net Income) – Revenue minus expenses.

3️⃣ Types of Accounts (Golden Rules of Accounting)

📍 Personal Account – Deals with individuals, firms, or institutions.
🔹 Rule: Debit the receiver, Credit the giver.
📍 Real Account – Deals with tangible and intangible assets.
🔹 Rule: Debit what comes in, Credit what goes out.
📍 Nominal Account – Deals with income, expenses, gains, and losses.
🔹 Rule: Debit all expenses & losses, Credit all incomes & gains.

4️⃣ Financial Statements

✅ Income Statement – Shows revenue, expenses, and profit/loss.
✅ Balance Sheet – Shows assets, liabilities, and equity at a given time.
✅ Cash Flow Statement – Tracks cash inflows and outflows.

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📌 Practical Example of Accounting Fundamentals

Let’s assume ABC Traders is a small business selling electronic gadgets. Here’s how the accounting fundamentals apply in real-world scenarios.

1️⃣ Recording a Transaction

On April 1, 2025, ABC Traders:

Purchased inventory worth ₹50,000 in cash.
Sold goods for ₹80,000 to a customer on credit.
Paid ₹5,000 as rent for the store.

Journal Entries

Date	Account	Debit (₹)	Credit (₹)
Apr 1, 2025	Inventory (Asset)	50,000	-
	Cash (Asset)	-	50,000
Apr 1, 2025	Accounts Receivable (Asset)	80,000	-
	Sales Revenue (Income)	-	80,000
Apr 1, 2025	Rent Expense (Nominal)	5,000	-
	Cash (Asset)	-	5,000

📌 Explanation:

The inventory purchase increases the Inventory (Asset) account and decreases Cash (Asset).
The sale increases Accounts Receivable (since it’s on credit) and records revenue.
Rent is recorded as an expense, reducing cash.

2️⃣ Creating Financial Statements

Income Statement (Profit & Loss Statement)

Particulars	Amount (₹)
Revenue (Sales)	80,000
Less: Expenses
Rent	(5,000)
Net Profit	₹75,000

📌 Key Takeaways:

Net profit = Revenue - Expenses
The business made ₹75,000 in profit from this transaction.

Balance Sheet (Assets = Liabilities + Equity)

Assets	Amount (₹)	Liabilities & Equity	Amount (₹)
Cash	45,000	Owner’s Equity	75,000
Accounts Receivable	80,000	Total Liabilities & Equity	₹1,25,000
Inventory	50,000

📌 Key Takeaways:

Assets = Liabilities + Equity
The company has ₹1,25,000 worth of assets after this transaction.

3️⃣ Cash Flow Statement

Activity	Cash Inflow (₹)	Cash Outflow (₹)
Operating (Inventory Purchase)	-	50,000
Operating (Sales Collected)	-	-
Operating (Rent Payment)	-	5,000
Net Cash Flow	-	₹55,000

📌 Key Takeaway:

Since the sales were on credit, no cash was received immediately.
The business spent ₹55,000 in cash but will receive ₹80,000 later.

💡 Conclusion:

The business made a profit (₹75,000) but cash flow is negative because sales were on credit.
The Balance Sheet remains balanced (Assets = Liabilities + Equity).
The Cash Flow Statement shows real-time cash movement, helping plan future expenses.

Would you like me to add tax calculations, depreciation, or other advanced concepts? 😊📊

📌 Fundamentals of Accounting