Basics of Accounting (fundamental of accounting)

In this article you will learn basics of accounting and Principle of accounting

Accounting has wide scope all over the world we need accountants in every business even a small or big one.
An accountant is necessary for all organizations from sole proprietorship to a company. Accounting enables an accountant to make statements according to an organization position.

We have different rules of accounting and one of the basics of accounting rule is describe in this article, So let’s talk about basics of accounting.

We have 5 different head of accounting which covers all activities take place within the organisation or outside of an organization.

Following are the heads of accounting,

1 Assets
2 liabilities
3 capital
4 Expenses
5 Revenues/Income

What is an asset?

An asset is the item of a business and it is used to run a business. An asset is something which is valuable which a business owns or has the uses of.
There are two types of assets

1. Current asset

Those assets which can easily convert into cash or those assets which have less than one year life.
Examples of current asset, Cash, inventories, bank, bank draft etc.

2. Non current asset

Those assets which can convert into cash easily or those assets which have more than one year life.
Examples of non current asset, Buildings, land, vehicles, equipments, merchandise etc.

2 liabilities

Owes by a business means when a business is responsible for to pay someone that is called liability.
We have two types of liabilities

1. Current liabilities

Those liabilities which have to pay within a years is known current liability.
Examples of current liability,

2. Non current liabilities

Those liabilities which can pay between 1 to 5 years or those liabilities which has to pay after one 1 year.
Examples of non current liabilities,

2 Capital

It means the invest by an owner in the business, we can say that without capital no business can take place and capital is the first step of setting up a business.

Drawing are the part of capital but it behaves as an expense.

4 Expenses

The money which we spent in a business or the money which is spent by a business for the purpose of generating profit is know as expenses.
Examples of expenses, factory rent, salaries, wages, utilities bill, hiring special tools etc.

5 Revenues/Income

Revenue means the profit which we are generating by sellings our products or services.
Basically our sales are our revenue.
Examples of revenue, sales revenue, services revenue, interest revenue etc.

Accounting Equation

The accounting equation means, Assets=Capital+liability.

How to understand debit and credit?

Here is very simple way I bring for you if you follow this strategy then of course you will solve the debit and credit problem easily.

Here is the trick,
1 Asset
2 Expense
3 Drawings

When these accounts balance increases they always debit and when they decrease it always credit.

4 liability
5 Capital
6 Revenue/Income

When these accounts increase they always credit and when they decrease it will always record on debit side.

These are the basics of accounting and if you learns these basics of accounting than you can solve any problem related to accounts.

Basics of Accounting (fundamental of accounting), this article is written in this way that everyone can understand it easily and I hope this will be helpful for you.

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