Lecture Notes: Basic Accounting
1. Introduction to Accounting
Accounting is the process of recording, classifying, summarizing, and interpreting financial transactions of a
business. It helps people understand the financial position and performance of an organization. The main goal of
accounting is to provide useful information for decision-making. The people who use accounting information
include business owners, managers, investors, creditors, and the government. Accounting is often called the
“language of business” because it communicates financial information clearly and accurately.
2. Basic Accounting Concepts and Principles
Accounting follows several important concepts and principles to ensure accuracy and consistency. The
Business Entity Concept states that the business is separate from the owner. The Going Concern Concept
assumes that the business will continue operating in the future. The Monetary Unit Concept means that all
transactions are recorded using money as a unit of measure. The Accounting Period Concept divides the life of
a business into regular time periods (such as months or years) for reporting. The Matching Principle states that
expenses should be recorded in the same period as the revenues they helped generate. These principles help
maintain fairness and reliability in financial reports.
3. The Accounting Equation
The basic accounting equation is:
Assets = Liabilities + Owner’s Equity
This equation shows that everything the business owns (assets) is financed either by borrowing money
(liabilities) or by the owner’s investment (owner’s equity). Assets are resources like cash, equipment, and
buildings. Liabilities are obligations such as loans and accounts payable. Owner’s equity represents the owner’s
claim after all debts are paid. The accounting equation must always stay balanced after every transaction.
4. The Accounting Cycle
The accounting cycle is a step-by-step process used to record and report financial transactions. It includes:
1. Identifying transactions
2. Recording them in the journal (journalizing)
3. Posting them to the ledger
4. Preparing a trial balance
5. Making adjusting entries
6. Preparing financial statements (Income Statement, Balance Sheet, and Statement of Owner’s Equity)
7. Making closing entries to reset accounts for the next period.
Following this cycle helps keep records organized and accurate.
5. Financial Statements
Financial statements are reports that summarize the financial activities of a business. The Income Statement
shows the business’s revenues and expenses, resulting in net income or loss. The Balance Sheet shows the
financial position of the business at a specific date—listing assets, liabilities, and owner’s equity. The
Statement of Owner’s Equity explains changes in the owner’s capital during the period. These statements are
used to evaluate the performance and stability of a business.
6. Importance of Accounting
Accounting is important because it helps business owners make smart financial decisions. It allows them to
track income and expenses, know if the business is earning profit, and comply with laws and taxes. Accounting
also builds trust with investors and other stakeholders by providing honest and accurate information. In short,
accounting keeps a business organized, helps it grow, and ensures accountability in all financial activities.
