Definition of Accounting: Accounting is an art and science of recording, classifying, summarizing business transactions in a systematic manner.
Business is an activity that is conducting to render some kind of product or service to the society in order to earn profit.
Transaction is an event happened in the business premises. Accountancy can only consider the transactions that are business related and can be expressed in terms of monetary values.
Steps to record a transaction under Double Entry System:
Identify atleast 2 parties involved in the transaction.
Identify basic account type of each party
Apply Debit and Credit rules for each party based on account type
Total Transaction amount to be debited once and again credit once. (i.e. total debited amount = total credited amount)
Basic Account Types:
Personal Accounts: Ledgers opened in the name of person or firms. Eg: Ram A/c, Pragathi&Co A/c, Bank A/c
Real Accounts: Ledgers opened in the name of Fixed/Floating Asset Eg: Cash A/c, Machinery A/c, Furniture A/c
Nominal Accounts: Ledgers opened in the name of an Expense, Loss, Income or Profit Eg: Salaries a/c, Received Rent a/c, Discount a/c
Debit/Credit Rules:
Debit
Credit
Personal a/c
Receiver
Giver
Real A/c
Coming in
Going out
Nominal A/c
Expense/Loss
Income/Profit
Note: While preparing accounts, we should think in the point of view of firm but not the owner. Owner is the person who has given credit to the firm in the form of capital. The invested capital should be kept for entire financial year (generally 1st april to 31st march). Firm would return profit/loss to the owner as the result of business. The amount utilized by the owner for his personal is to be considered as Drawings and the same is to be deducted from his capital.