Learn Accounting — Fundamentals Course
A complete, four-chapter walkthrough of financial and cost accounting fundamentals — written plainly, with worked examples and practice questions in every chapter. Read it end to end, or jump straight to what you need.
Start Chapter 1 →Accounting Basics
Every business, however small, needs to answer two questions on an ongoing basis: did we make a profit or a loss, and what do we own and owe right now? Accounting exists to answer both, systematically and in money terms, so the answers can be trusted, compared over time, and checked by someone else.
What accounting actually does
Strip away the jargon, and accounting is a four-step discipline: record every transaction that has a money value, classify those records into meaningful groups (all the rent payments together, all the sales together), summarise them into a small number of statements, and interpret what those statements say about the business. Everything else in this course is detail underneath those four verbs.
The three branches
"Accounting" isn't one discipline — in practice it splits three ways, and it helps to know which one you're in:
| Branch | Answers | Audience |
|---|---|---|
| Financial accounting | What happened last year? Are we profitable? What do we own and owe? | Owners, investors, banks, tax authorities — mostly outsiders |
| Cost accounting | What does it actually cost us to make one unit of this product? | Production and operations managers |
| Management accounting | Should we launch this product? Raise this price? Cut this cost centre? | Senior management, for decisions — not compliance |
This course covers financial accounting fully (Chapters 1–3) and the foundations of cost accounting (Chapter 4) — management accounting builds on both, and is really a decision-making layer on top of the numbers these two branches produce.
Cash basis vs accrual basis
The single biggest choice in how a business keeps its books is when a transaction gets recorded.
| Cash basis | Accrual basis | |
|---|---|---|
| Revenue recorded when… | cash is received | the sale happens, regardless of when cash arrives |
| Expense recorded when… | cash is paid | the expense is incurred, regardless of when cash is paid |
| Used by | very small businesses, some professionals | virtually all companies; required under most accounting standards |
The accounting cycle
Every transaction, from the first one on day one to the last one before the books close, travels through the same sequence:
You can watch this happen live, entry by entry, in the Accounting Practice simulator — it's the same six steps, just interactive.
Basic accounting terms
| Term | Meaning |
|---|---|
| Assets | What the business owns — cash, stock, machinery, amounts owed to it |
| Liabilities | What the business owes — loans, creditors, outstanding expenses |
| Capital | What the owner has invested in the business (assets minus liabilities, from the owner's side) |
| Drawings | Cash or goods the owner takes out of the business for personal use |
| Debtor | Someone who owes the business money (a customer who bought on credit) |
| Creditor | Someone the business owes money to (a supplier it bought from on credit) |
| Revenue | Income earned from the business's normal operations — chiefly sales |
| Expense | The cost of resources used up in earning that revenue |
Accounting principles, concepts & conventions
These are the rules of the road — the assumptions every set of accounts is built on, without which no two companies' numbers could ever be compared.
| Principle | What it means |
|---|---|
| Going concern | Assume the business will keep operating, not shut down tomorrow — so assets are valued as productive resources, not forced-sale scrap |
| Money measurement | Only record what can be expressed in money — staff morale doesn't appear on a balance sheet, however real it is |
| Accounting period | Split the continuous life of a business into fixed intervals (usually a year) so performance can be measured and compared |
| Accrual | Record revenue and expenses when they occur, not when cash moves (see above) |
| Matching | An expense is recorded in the same period as the revenue it helped generate — not whenever it happens to be paid |
| Full disclosure | Include everything a reader would need to interpret the accounts correctly, even in notes and footnotes |
| Dual aspect | Every transaction has two equal, opposite effects — the entire basis of double-entry bookkeeping |
| Historical cost | Record assets at what was actually paid for them, not today's estimated market value |
| Consistency | Once you pick a method (say, straight-line depreciation), keep using it period after period |
| Conservatism (prudence) | Anticipate losses as soon as they're likely; recognise gains only once they're realised |
| Materiality | Only bother with the level of precision that could actually change a reader's decision — round a ₹4 rounding difference, don't round a ₹4 lakh one |
Capital vs revenue — expenditure, receipts, and why it matters
Get this distinction wrong and both your profit figure and your balance sheet are wrong.
| Capital | Revenue | |
|---|---|---|
| Expenditure | Buys or improves a long-term asset (machinery, a building, a vehicle) — benefit spreads over years | Keeps the business running day to day (rent, wages, electricity) — benefit used up within the year |
| Where it goes | Balance sheet, as an asset (then depreciated over its life) | Profit & Loss account, as an expense, in full, this year |
| Receipt | Money from selling a fixed asset, or from a loan/capital introduced | Money from normal trading — sales, commission earned, interest earned |
Double-entry bookkeeping and the golden rules
Every transaction is recorded twice — once as a debit, once as a credit, of equal value — which is what keeps the whole system self-checking. The traditional way to decide which side an entry goes on is the three golden rules, one per account type:
| Account type | Examples | Rule |
|---|---|---|
| Personal accounts | Debtors, creditors, the owner's capital account | Debit the receiver, credit the giver |
| Real accounts | Cash, machinery, stock, buildings | Debit what comes in, credit what goes out |
| Nominal accounts | Rent, salaries, sales, commission received | Debit all expenses and losses, credit all incomes and gains |
Sales A/c (nominal account) — this is income → credit.
Journal entry: Cash A/c Dr ₹20,000 — To Sales A/c ₹20,000
You can build entries like this yourself, for 35+ transaction types including GST and TDS, in the Accounting Practice simulator.
Books of prime entry & subsidiary books
Rather than writing every single transaction straight into the ledger, most businesses first sort them into specialised day-books, each handling one type of repetitive transaction:
| Book | Records |
|---|---|
| Purchases book | Credit purchases of goods |
| Sales book | Credit sales of goods |
| Purchase returns book | Goods returned to suppliers |
| Sales returns book | Goods returned by customers |
| Cash book | All cash and bank receipts/payments — often doubles as both a book of prime entry and the cash/bank ledger account itself |
| Journal proper | Everything that doesn't fit the books above — opening entries, adjustments, rectifications |
Cash books commonly come in three variants: a single-column cash book (cash only), a double-column cash book (cash plus bank, side by side), and a triple-column cash book (cash, bank, and a discount column for discount allowed/received alongside each entry).
Trial balance
Once every transaction has been posted from the journal/subsidiary books into individual ledger accounts, the trial balance lists every account's closing balance in two columns — debit and credit — and totals them.
If the two totals match, it confirms the double-entry arithmetic is internally consistent — it does not prove there are no errors. A transaction posted to the wrong account, or left out entirely, or posted with equal (but wrong) amounts on both sides, will still leave the trial balance perfectly balanced. That's why a trial balance is a checkpoint, not a guarantee.
Depreciation
Fixed assets lose value over time through wear, obsolescence, or the passage of time — depreciation is how that loss gets spread across the accounting periods that benefited from using the asset, rather than dumped entirely into the year it was bought.
| Straight-line method (SLM) | Written-down value method (WDV) | |
|---|---|---|
| Formula | (Cost − Salvage value) ÷ Useful life | Book value at start of year × Rate % |
| Annual charge | Same amount every year | Highest in year one, shrinking every year after |
| Best suited to | Assets that wear evenly (furniture, buildings) | Assets that lose value fastest when new (vehicles, computers, machinery) |
Rectification of errors
Not every error unbalances the trial balance. Errors of principle (a capital item recorded as revenue), errors of omission (a transaction never recorded at all), and compensating errors (two mistakes that happen to cancel out) all leave the trial balance perfectly balanced — the account is still wrong, the arithmetic just doesn't catch it. Errors that genuinely throw the trial balance out of balance (a one-sided entry, a wrong total carried forward) get parked temporarily in a suspense account until they're traced and corrected, so the books can still be closed on time while the investigation continues.
Opening, transfer, adjustment & closing entries
- Opening entries — bring forward last year's closing balances of assets, liabilities and capital as this year's opening balances.
- Transfer entries — move a balance from one account to another (e.g. transferring the balance of a nominal account into the Trading or P&L account at year-end).
- Adjustment entries — record items that belong to this period but haven't yet hit the books: outstanding expenses, prepaid expenses, accrued income, income received in advance, depreciation, closing stock.
- Closing entries — at year-end, transfer every revenue and expense account's balance into the Trading and Profit & Loss accounts, reducing them to zero so next year starts fresh.
Bank reconciliation statement (BRS)
A business's own cash book and the bank's own record of the same account almost never show the identical balance on any given day — not because of an error, but because of timing. A cheque the business has written and recorded is still "in the post" until the payee deposits it; a bank charge is deducted by the bank before the business even hears about it. A BRS is simply the reconciliation between the two, explaining every difference line by line.
| Common causes of difference | Effect |
|---|---|
| Cheques issued but not yet presented for payment | Cash book balance is lower than the bank's, until the cheque clears |
| Cheques deposited but not yet cleared/credited | Cash book balance is higher than the bank's, until it clears |
| Bank charges / interest debited by the bank | Bank reduces the balance before the business records it |
| Direct credits (e.g. a customer's NEFT) the business hasn't recorded yet | Bank balance is higher until the business catches up |
Practice yourself — Chapter 1
1. A company pays ₹40,000 rent in cash for the current month. Which account is debited, and why?
Answer: Rent A/c is debited — it's an expense (nominal account), and the rule for nominal accounts is "debit all expenses and losses."
2. Is buying a new office building capital or revenue expenditure? What about painting the existing office?
Answer: Buying the building is capital expenditure (a long-term asset). Painting the existing office is revenue expenditure (routine upkeep, no lasting increase in the asset's value or life).
3. A trial balance balances perfectly. Does that guarantee the books are error-free?
Answer: No — errors of omission, errors of principle, and compensating errors all leave the trial balance balanced while the underlying accounts are still wrong.
4. Which depreciation method charges the highest amount in the asset's first year: SLM or WDV?
Answer: WDV — it applies a fixed percentage to a shrinking book value, so the very first year (on the full original cost) carries the largest charge.
Accounting for Special Transactions
Most transactions a business records are routine — a sale, a purchase, an expense paid. This chapter covers three transaction types that follow their own distinct accounting logic: bills of exchange, consignment, and joint ventures.
Bills of exchange
A bill of exchange is a written, signed, unconditional order from one party (the drawer) directing another party (the drawee) to pay a fixed sum of money, either on demand or on a specified future date, to a named person (the payee — often the drawer themselves). In practice, it's how a seller formalises a buyer's promise to pay later, and turns that promise into something that can itself be transferred, discounted, or used as evidence of debt.
| Feature | Detail |
|---|---|
| Acceptance | The drawee signs the bill to signal agreement to pay — until accepted, it's just a draft |
| Maturity / due date | Usually includes 3 days of grace beyond the stated tenure, by convention |
| Honouring | The drawee pays on the due date — the bill is closed |
| Dishonouring | The drawee fails to pay — the drawer can "note and protest" the bill as formal evidence of non-payment |
| Discounting | The holder can get immediate cash from a bank before maturity, at a discount (interest deducted upfront) |
| Endorsement | The holder can transfer the bill to someone else (e.g. to settle their own debt) simply by signing it over |
On sale: B's A/c Dr ₹1,00,000 — To Sales A/c ₹1,00,000
On acceptance: Bills Receivable A/c Dr ₹1,00,000 — To B's A/c ₹1,00,000
If A discounts the bill immediately with a bank for ₹98,000 (a ₹2,000 discount charge): Bank A/c Dr ₹98,000, Discount A/c Dr ₹2,000 — To Bills Receivable A/c ₹1,00,000
Consignment accounting
Consignment is when a manufacturer or wholesaler (the consignor) sends goods to an agent (the consignee) to sell on their behalf — critically, ownership of the goods never transfers to the consignee. The consignee is selling someone else's goods for a commission, not buying and reselling their own stock. This is what separates consignment from an ordinary sale.
| Term | Meaning |
|---|---|
| Cost price | What the goods actually cost the consignor to make or acquire |
| Invoice price | A price the consignor marks the goods at when sending them — often cost plus a notional profit margin, purely to keep the consignee from learning the real cost or profit |
| Commission | What the consignor pays the consignee for selling the goods — often a flat % of sales, sometimes with extra "del credere" commission for the consignee guaranteeing customer payments (bearing the bad-debt risk) |
| Valuation of unsold stock | Unsold goods at year-end are valued at cost (or invoice price, adjusted back to cost) plus a proportionate share of the direct expenses of getting them to the consignee — freight, carriage, insurance in transit |
Consignment also distinguishes between normal loss (unavoidable — evaporation, natural wastage — spread across the cost of remaining good units) and abnormal loss (fire, theft, accident — valued separately and charged straight to the P&L, not absorbed into the cost of the remaining stock).
Joint venture
A joint venture is an agreement between two or more parties (co-venturers) to carry out a specific business venture together — often a single, time-bound project like a construction contract or a one-off consignment of goods — and to share the resulting profit or loss in an agreed ratio. It ends when the venture ends; it isn't an ongoing partnership.
| Joint venture | Partnership | |
|---|---|---|
| Duration | One specific venture, then dissolves | Ongoing, until dissolved by agreement |
| Name/business | No separate firm name needed | Usually operates under a firm name |
| Books of account | Not compulsory — can be tracked in one co-venturer's own books | Separate books are maintained for the firm |
Three common ways to keep the accounts, depending on how formal the arrangement is: a separate set of books for the venture itself (most formal), accounting for it within one co-venturer's own books (that venturer keeps a Joint Venture account and a co-venturer's personal account), or the memorandum joint venture method, where each co-venturer records only their own transactions in their own books, and a separate "memorandum" account (not part of the double-entry system) is used just to work out the overall profit and each party's share.
Practice yourself — Chapter 2
1. What happens when a bill of exchange is dishonoured?
Answer: The drawee has failed to pay on the due date; the drawer can have the bill formally "noted and protested" as legal evidence of non-payment, and the debt reverts to being recorded as an ordinary receivable.
2. Why might a consignor mark goods at an invoice price higher than cost, rather than just sending them at cost?
Answer: To prevent the consignee from knowing the consignor's actual cost price and real profit margin — the inflated figure is reversed out when calculating the consignor's true profit.
3. A fire destroys part of the consigned goods in the consignee's warehouse. Is this a normal or abnormal loss, and how is it treated?
Answer: Abnormal loss — it's valued separately at cost (plus proportionate expenses) and charged directly to the consignment's Profit & Loss, not spread across the remaining stock the way normal wastage would be.
4. Two traders agree to jointly buy and resell a batch of imported machinery, splitting the profit 60:40, and wind up the arrangement once it's sold. Is this a partnership?
Answer: No — it's a joint venture: a single, time-bound venture that dissolves once complete, not an ongoing business relationship.
Preparation of Final Accounts
Once a year's transactions are all posted and the trial balance agrees, the final step is turning that raw trial balance into the three statements anyone outside the business actually wants to see: how much was earned, how, and what the business is worth today.
For a trading/profit-making concern
Three statements, prepared in sequence, each feeding into the next:
Trading Account — works out gross profit: revenue from sales, less the direct cost of the goods sold.
Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses − Closing Stock
Profit & Loss Account — starts from gross profit, then deducts every indirect/operating expense (salaries, rent, marketing, depreciation) and adds any other income (interest received, discount received), to arrive at net profit.
Balance Sheet — a snapshot, not a period summary: everything the business owns (assets) on one side, everything it owes plus the owner's stake (liabilities + capital) on the other. It always balances, by construction — that's the whole point of double-entry.
Cost of goods sold = ₹80,000 + ₹6,20,000 + ₹30,000 − ₹60,000 = ₹6,70,000
Gross profit = ₹9,50,000 − ₹6,70,000 = ₹2,80,000
Build a full version of this — with stock, WIP and overhead adjustments — in the detailed cost sheet tool, or post the underlying sale/purchase transactions and watch the P&L build itself in the Accounting Practice simulator.
Year-end adjustments
A trial balance only shows what's already been recorded — several things are always true at year-end but haven't hit the books yet, and have to be adjusted in:
| Adjustment | Effect |
|---|---|
| Closing stock | Reduces cost of goods sold; appears as a current asset |
| Outstanding (unpaid) expenses | Increases the expense in P&L; appears as a current liability |
| Prepaid expenses | Reduces the expense in P&L; appears as a current asset |
| Accrued (earned but unreceived) income | Increases income in P&L; appears as a current asset |
| Income received in advance | Reduces income in P&L; appears as a current liability |
| Depreciation | Increases expense in P&L; reduces the asset's value on the balance sheet |
| Bad debts / provision for doubtful debts | Increases expense in P&L; reduces debtors on the balance sheet |
For a not-for-profit organisation
Clubs, societies and charities don't trade for profit, so they use three differently-named (but structurally similar) statements:
| Statement | Equivalent to | Basis |
|---|---|---|
| Receipts & Payments Account | A summarised cash book | Cash basis — every cash movement, capital or revenue, in or out |
| Income & Expenditure Account | Profit & Loss Account | Accrual basis — only revenue items, adjusted for outstanding/prepaid amounts |
| Balance Sheet | Balance Sheet | Same idea — assets, liabilities, and accumulated fund instead of capital |
The trickiest part is usually converting the Receipts & Payments Account (pure cash-basis) into the Income & Expenditure Account (accrual-basis) — every cash figure has to be adjusted for last year's and this year's outstanding/prepaid/advance amounts, exactly the same adjustment logic as Chapter 1's accrual concept, just applied item by item. A few NPO-specific items also need special treatment: subscriptions (a member's periodic dues — adjusted for arrears and advances, since not every member pays exactly on time), legacies (money or property left to the organisation in someone's will — usually capitalised, since it's meant to build the organisation's fund, not fund routine running costs), and life membership fees (a one-time payment in lieu of years of subscription — normally capitalised too, since it represents many future years' worth of dues collected up front).
Practice yourself — Chapter 3
1. A business has opening stock ₹1,20,000, purchases ₹8,00,000, and closing stock ₹95,000. No direct expenses. What's the cost of goods sold?
Answer: ₹1,20,000 + ₹8,00,000 − ₹95,000 = ₹8,25,000.
2. Rent of ₹18,000 for March was paid in April, after the books closed for the year ending 31 March. How should it be treated in the year just closed?
Answer: As an outstanding expense — it belongs to March (the year that just ended) under the accrual concept, so it's added to the P&L expense for that year and shown as a current liability, even though it wasn't paid yet.
3. Why do not-for-profit organisations prepare an Income & Expenditure Account rather than just relying on the Receipts & Payments Account?
Answer: Receipts & Payments is pure cash-basis and mixes capital and revenue items together — it can't show the organisation's true "surplus or deficit" for the year the way an accrual-based Income & Expenditure Account can.
4. Should a legacy received by a charity normally be treated as revenue income for the year?
Answer: No — legacies are normally capitalised (added to the organisation's capital/accumulated fund), since they're typically intended to strengthen the organisation's long-term resources, not fund this year's routine activities.
Fundamentals of Cost Accounting
Financial accounting tells a business whether it made a profit overall. Cost accounting answers a sharper question: what does it actually cost to make one unit of this specific product or service — and that answer is what pricing, cost-cutting, and make-or-buy decisions actually run on.
Why cost accounting exists
Financial accounts are built for outsiders and only appear once a year, long after the decisions they'd inform have already been made. Cost accounting exists to fill that gap: frequent, detailed, product-level cost information, built for people running the business day to day.
| Financial accounting | Cost accounting | |
|---|---|---|
| Scope | The business as a whole | Individual products, jobs, or processes |
| Frequency | Annual (sometimes quarterly) | Continuous — weekly, daily, even per batch |
| Mandatory? | Yes, for statutory/tax filing | Voluntary, unless required by a specific industry regulation |
| Audience | Shareholders, tax authorities, banks — external | Production and operations managers — internal |
Management accounting sits one layer above both — it isn't really a separate record-keeping system, more a decision-making lens applied to whatever financial and cost data is already available, to answer forward-looking questions like pricing and investment choices.
Classifying costs
The same rupee of cost can be classified several different ways depending on what question you're trying to answer:
| Classification basis | Categories |
|---|---|
| By nature | Material, labour, expenses |
| By function | Production, administration, selling & distribution |
| By behaviour (with volume) | Fixed (rent — doesn't change with output), variable (raw material — moves directly with output), semi-variable (electricity — a fixed base charge plus a usage-based component) |
| By traceability | Direct (traceable straight to one product — the steel in a specific machine) vs indirect/overhead (shared across many products — the factory supervisor's salary) |
| By controllability | Controllable (a department head can influence it) vs uncontrollable (fixed by decisions made elsewhere) |
The cost sheet
A cost sheet builds up a product's total cost in stages, and each stage has a name worth knowing:
Works/Factory Cost = Prime Cost + Factory Overhead
Cost of Production = Works Cost + Office & Admin Overhead
Total Cost = Cost of Production + Selling & Distribution Overhead
Selling Price = Total Cost + Profit Margin
Prime cost = ₹5,70,000 → Works cost = ₹6,60,000 → Cost of production = ₹7,00,000 → Total cost = ₹7,30,000 → Profit = ₹1,09,500 → Selling price = ₹8,39,500
This is exactly what the site's detailed cost sheet tool calculates for you automatically, with full stock-adjustment support — and it goes further, into overhead absorption rates, standard-costing variances, EOQ and break-even analysis.
Practice yourself — Chapter 4
1. Is a factory supervisor's salary a direct or indirect cost?
Answer: Indirect (overhead) — it can't be traced to one specific unit of product; it benefits the whole factory's output.
2. An electricity bill has a fixed monthly charge plus a per-unit usage rate. What kind of cost behaviour is this?
Answer: Semi-variable — part fixed (doesn't change with output), part variable (moves with usage).
3. What's added to Works Cost to arrive at Cost of Production?
Answer: Office and administration overhead.
4. Why is cost accounting usually voluntary while financial accounting is mandatory?
Answer: Financial accounts exist to meet statutory and tax-filing obligations to outsiders; cost accounts exist purely to help management run the business better, so a business adopts as much (or as little) cost accounting detail as it finds useful, unless a specific industry regulation requires more.
Quick links
Study tip
"Don't just read a worked example — cover the answer, work it out yourself first, then check. That's the difference between recognising a method and actually knowing it."
— AccountsSkill