Accounting From Zero
You have never studied commerce. This page assumes exactly that. It builds the whole of Units 1–3 from one idea — a business is a separate person who owes everything it has to somebody — and it does not move on until each piece of that sentence is doing real work for you.
Every rule you are about to learn — debit, credit, personal accounts, trial balance, depreciation — is a consequence of a single equation:
In words: everything the business has (assets) was given to it by someone — either the owner (capital) or an outsider (liabilities). Nothing arrives from nowhere. That is why every transaction touches two accounts, and that is the whole of double entry. Textbook p. 43
1. The business is a separate person from you
This is the single idea that unlocks everything, and it is the one that non-commerce students most often skip past. Your lecture deck calls it the Business Entity Concept: "Entity is different from its owner for accounting purposes" L1 slide 20.
Suppose you put ₹30,00,000 of your own savings into a toy shop. Common sense says: that's my money, in my shop. Accounting says something stranger and far more useful:
That debt the shop owes you is called CAPITAL. It sits on the liabilities side of the balance sheet — because from the shop's point of view, it is money owed to an outsider who happens to be you.
This is why students are baffled that capital is a liability. It is not a trick. It is the direct consequence of treating the business as its own person. Textbook p. 17 puts it flatly: "Capital invested by proprietor or partner is also a liability as the business firm is independent from them, so far as accounting is concerned."
Mr. Roopchand Khilonewalla ran a toy business for three years, sold ₹6 crore of toys, and was refused a ₹15,00,000 bank loan L1 slides 2–8. Not because the business was bad. Because he could not answer three questions:
- What profit did you make each year? — He had no Profit & Loss Account.
- What assets do you own, as security? — He kept no record of the furniture, equipment, or calculators he bought.
- How much did you take out for yourself? — He took household money straight from the till and recorded nothing.
His three arguments were all wrong, and each one is a concept you are about to learn:
· "I have no liability except my father's money." Wrong — his own capital is a liability too.
· "I'm the owner, so I needn't record money I take." Wrong — Business Entity Concept: that is drawings, and it reduces capital.
· "I earned enough profit, my household expenses came from it." Wrong — household expense is not a business expense; mixing them means the profit figure is unknowable.
2. There are only five kinds of thing in all of accounting
Every account you will ever open in this course falls into exactly one of five buckets. Learn these five and you can classify anything.
| Bucket | Plain-English test | Examples | Normal balance | Lives on |
|---|---|---|---|---|
| ASSET | Something the business has or is owed. It has future value. | Cash, Bank, Stock, Furniture, Machinery, Building, Debtors, Bills Receivable, Prepaid Rent, Goodwill | Debit | Balance Sheet — Assets side |
| LIABILITY | Something the business owes to an outsider. | Creditors, Bills Payable, Bank Loan, Bank Overdraft, Outstanding Salary, Income Received in Advance | Credit | Balance Sheet — Liabilities side |
| CAPITAL | What the business owes the owner. Assets minus outside liabilities. | Capital A/c (reduced by Drawings A/c, increased by profit) | Credit | Balance Sheet — Liabilities side |
| INCOME / GAIN | Value flowing in that the business does not have to give back. | Sales, Commission Received, Rent Received, Discount Received, Interest Received, Bad Debts Recovered | Credit | Profit & Loss — Credit side |
| EXPENSE / LOSS | Value used up in earning the income. Gone; nothing left to show. | Purchases, Wages, Salaries, Rent, Carriage, Insurance, Depreciation, Bad Debts, Discount Allowed | Debit | Profit & Loss — Debit side |
Asset vs Expense. Both involve money going out. The test is: after the money leaves, is there still something of value left over?
Buy a delivery van for ₹6,00,000 → you still have a van → ASSET, goes to the Balance Sheet.
Buy petrol for that van for ₹3,000 → it is burnt → EXPENSE, goes to the P&L.
This is exactly the Capital vs Revenue Expenditure question in Unit 1, and your L2 deck drills it with the car example L2 slides 9–10. Same test, formal name.
3. Where everything lands: the two statements
At the end of the year, every one of your accounts is closed into exactly one of two documents. Knowing which one is half of every exam question.
(and the Trading A/c before it)
Takes INCOME (credit side) minus EXPENSES (debit side). The difference is the profit or loss.
Wiped clean every year — these are "nominal" accounts and they start again at zero.
Lists ASSETS on one side, CAPITAL + LIABILITIES on the other. They are equal by construction.
Carried forward — today's closing balance is tomorrow's opening balance.
The profit calculated in the P&L does not vanish. It flows into the Balance Sheet by being added to Capital — because profit belongs to the owner. A loss is subtracted. Drawings are subtracted too. That link is why the Balance Sheet balances:
4. Debit and credit are not "plus" and "minus"
This is the wall almost every beginner hits. "Debit" does not mean decrease and "credit" does not mean increase. They are simply the left and right sides of an account, and nothing more L3 slide 4.
What makes them meaningful is this: each of the five buckets has a home side. Put a thing on its home side and it grows; put it on the other side and it shrinks.
| Bucket | Home side (increase) | Other side (decrease) | So a "normal" balance is… |
|---|---|---|---|
| Asset | Debit ← | Credit | Debit |
| Expense / Loss | Debit ← | Credit | Debit |
| Liability | Credit → | Debit | Credit |
| Capital | Credit → | Debit | Credit |
| Income / Gain | Credit → | Debit | Credit |
All ASSETS and EXPENSES have debit balances. All LIABILITIES and INCOMES have credit balances.
Two of five on the left; three of five on the right. That is the whole of the "modern rules".
Notice how neatly this falls out of the accounting equation. Assets sit on the left of Assets = Capital + Liabilities, so assets are debit-natured. Capital and liabilities sit on the right, so they are credit-natured. Expenses reduce capital, so they must sit opposite capital — debit. Income increases capital, so it sits with capital — credit. Nothing is arbitrary.
Because the equation must keep holding. If an asset goes up by ₹1,000, then either another asset went down by ₹1,000, or a liability/capital went up by ₹1,000, or income went up by ₹1,000. Every single time. The "double" in double entry is not a convention — it is arithmetic. Textbook p. 44
5. The Indian "golden rules" — the same thing, said differently
Your class teaches a second, older classification alongside the five buckets: Personal, Real and Nominal L3 slide 6. You must know both, because exam questions are worded in this language — and because the faculty's own journal sheet is set in it.
Credit the GIVER
Natural: Ram, Sita, Laxman
Artificial: a company, a BANK, a club, a firm
Representative: Outstanding Salary A/c, Prepaid Rent A/c — they stand in for a group of people
Also: Capital A/c and Drawings A/c (they represent the owner).
Credit what GOES OUT
Tangible: Cash, Furniture, Machinery, Building, Stock, Land
Intangible: Goodwill, Patents, Trademarks
Trap: Cash is real, Bank is personal. The textbook flags this explicitly p. 47 — a bank balance is money held by an institution, so the account is that institution's.
Credit all INCOMES & GAINS
Rent, Salaries, Wages, Insurance, Commission, Interest, Discount, Purchases, Sales, Depreciation, Bad Debts.
Trap: adding a prefix turns a nominal account personal — Rent A/c is nominal, Outstanding Rent A/c is personal p. 48.
Take: Paid rent ₹500 by cheque.
Modern route: Rent is an expense → expenses increase on debit → Rent A/c Dr. Bank is an asset going down → assets decrease on credit → To Bank A/c.
Golden route: Rent is nominal, an expense → debit all expenses → Rent A/c Dr. Bank is personal, and the bank is giving the money → credit the giver → To Bank A/c.
6. "Goods" — the word that causes more confusion than any other
You asked exactly the right question. Here is the rule, and it is absolute: there is no such thing as a Goods Account. The textbook devotes a section to it p. 51, §3.7(B).
| What happened to the goods | Account to use | Type | Normal side | Ends up in |
|---|---|---|---|---|
| Goods came in — you bought them to resell | Purchases A/c | Nominal (expense) | Dr | Trading A/c — Dr side |
| Goods went out — you sold them | Sales A/c | Nominal (income) | Cr | Trading A/c — Cr side |
| Goods you bought came back out — you returned them to the supplier | Purchase Returns A/c (a.k.a. Returns Outward) | Nominal | Cr | Deducted from Purchases |
| Goods you sold came back in — the customer returned them | Sales Returns A/c (a.k.a. Returns Inward) | Nominal | Dr | Deducted from Sales |
| Goods still unsold at year end | Closing Stock A/c | Real (asset) | Dr | Balance Sheet — Asset |
| Goods taken by the owner for home use | Drawings A/c | Personal | Dr | Deducted from Capital |
| Goods destroyed — fire, theft, spoilage | Loss by Fire A/c (or Loss of Stock A/c) | Nominal (loss) | Dr | P&L — Dr side |
| Goods given away as free samples | Advertisement A/c | Nominal (expense) | Dr | P&L — Dr side |
| Goods given as charity | Charity / Donation A/c | Nominal (expense) | Dr | P&L — Dr side |
Whenever goods leave the business for any reason other than a sale — drawings, fire, samples, charity — the credit is always the same:
| Drawings / Loss by Fire / Advertisement / Charity A/c | Dr. | xxx | |
| To Purchases A/c | xxx |
And always at cost price, never selling price — you did not earn a profit on your own dining table.
7. Cash or Bank? The other question you asked
These are two different accounts and mixing them is a guaranteed lost mark. The test is purely mechanical — look for the instrument named in the transaction.
| Words in the question | Account | Why |
|---|---|---|
| "paid cash", "received cash", "in cash", "cash memo" | Cash A/c | Physical notes moved. Real account. |
| "by cheque", "cheque issued", "cheque received", "drew a cheque" | Bank A/c | The bank moved it. Personal account. |
| "NEFT", "RTGS", "UPI", "net banking", "online transfer" | Bank A/c | Electronic transfer through the bank. |
| "debit card", "credit card" (paid by) | Bank A/c | Charged to the bank account. |
| "deposited into bank", "Cash Deposit Machine" | Bank A/c Dr. / To Cash A/c | A contra entry — money moves between your own two accounts. No income, no expense. |
| "withdrew from bank for office use" | Cash A/c Dr. / To Bank A/c | Contra, the other direction. |
| "withdrew from bank for personal use" | Drawings A/c Dr. / To Bank A/c | Not contra — the money left the business entirely. |
| "bank charges", "bank interest charged" | Bank Charges A/c Dr. / To Bank A/c | Nominal expense; the bank took it directly. |
| "bank overdraft" | Bank A/c with a credit balance | You owe the bank — it flips from asset to liability. |
| Nothing said at all | Cash A/c | Default assumption when the mode is silent. |
8. Cash or credit? The rule your textbook spells out
The second great beginner trap: when a person's name appears, does their account get used, or not? Textbook §3.7(C), pp. 51–52 answers it with four transactions that look almost identical:
| Transaction | Entry | Reason |
|---|---|---|
| (i) Sold goods for ₹5,000 cash | Cash A/c Dr. / To Sales A/c | Cash received; no one owes you anything. |
| (ii) Sold goods to Dheera for ₹5,000 cash | Cash A/c Dr. / To Sales A/c | Dheera's name is irrelevant. She paid immediately, so she owes nothing. Crediting her account would wrongly make her your creditor. |
| (iii) Sold goods for ₹5,000 (mode not stated, no name) | Cash A/c Dr. / To Sales A/c | Treat silence as cash. If it were credit, the question would have to name the buyer so you could collect. |
| (iv) Sold goods for ₹5,000 on credit to Dheera | Dheera's A/c Dr. / To Sales A/c | Now she owes you. She becomes a debtor — an asset. |
9. Payment vs advance, receipt vs advance
Same logic, one step further pp. 52–53. When you pay somebody, ask: have they already done the work?
| Situation | Debit | Why that account |
|---|---|---|
| Salary paid to Rakesh ₹1,000 (he has worked) | Salary A/c — not Rakesh | The service is consumed. Nothing is recoverable from Rakesh. It is an expense. |
| ₹2,000 paid to Kalyan as advance for repairs | Kalyan's A/c — not Repairs | No service yet. If he doesn't do the work you can demand it back, so he is a debtor — an asset. |
| Commission received from Suresh Ltd ₹1,000 (you have served) | Cr. Commission A/c | Earned. It is income. |
| Advance for commission received from Rao ₹5,000 | Cr. Rao's A/c | Not earned yet; refundable. Rao is a creditor — a liability. |
The same principle, stated once and applied everywhere: an amount paid or received before the service is a balance-sheet item (someone owes someone). After the service, it is a P&L item (income or expense). This is the Accrual Concept from Unit 1 L1 slide 24 doing real work.
10. Trade discount vs cash discount — one is recorded, one is invisible
Goods list ₹10,000, trade discount 10% → record the sale as ₹9,000. There is no "Trade Discount A/c" anywhere p. 15.
Mention it only in the narration.
· You give it → Discount Allowed A/c Dr. (expense)
· You get it → To Discount Received A/c (income)
Give-away phrase: "in full settlement of".
| Cash A/c | Dr. | 24,700 | |
| Discount Allowed A/c | Dr. | 300 | |
| To Shanthi's A/c | 25,000 |
11. The map: how the three units fit together
Everything in the M1 portion is one pipeline. Each unit is one stretch of it.
- A transaction happens. Goods are bought, a salary is paid, a customer pays up. Unit 1 tells you whether it is even recordable (Money Measurement Concept) and whether it is capital or revenue in nature.
- Identify the two accounts it touches and classify each as Personal / Real / Nominal — or as one of the five buckets. Unit 2, and Sections 5–10 above.
- Apply the rule to decide which is debited and which is credited. Write it in the Journal, with a narration. Unit 2.
- Post to the Ledger. Every account gets its own page; every journal line is copied to the matching side. Unit 2.
- Balance each ledger account and list all the balances in a Trial Balance. Debits must equal credits, or something is arithmetically wrong. Unit 2 — and this is where your M1 syllabus stops for the recording side.
- Adjust for depreciation before the statements are drawn, because a fixed asset that was used up during the year must be charged against the revenue it helped earn — the Matching Concept from Unit 1. Unit 3.
- Prepare the Trading A/c, P&L A/c and Balance Sheet. Unit 4 — beyond the M1 portion, taught from Lecture 6 onward and examined in the TEE only Course Policy p. 4.
Read The Account Dictionary next — it lists every account name that can appear in your exam, its type, its rule, and which side of which statement it lands on. Then Which Account? Dr or Cr? turns all of this into a repeatable routine you can run on any wording. After that, the units themselves will read like revision.