Accounting is the language of business. Bank exams and many Lok Sewa papers ask about the accounting equation, the double-entry system, journals and ledgers, the trial balance and the balance sheet. This note explains the basic terms simply, with short examples.
1. Key terms
| Term | Meaning |
|---|---|
| Assets | Things owned that have value: cash, building, machinery, money receivable |
| Liabilities | Amounts owed to others: loans, creditors, bills payable |
| Capital | Owner’s investment in the business |
| Revenue / income | Money earned from selling goods or services |
| Expense | Cost incurred to earn revenue: salary, rent, electricity |
| Debtor | Person who owes money to the business |
| Creditor | Person to whom the business owes money |
| Depreciation | Fall in the value of a fixed asset due to use and time |
Accounting equation: Assets = Liabilities + Capital. Every transaction keeps this equation balanced.
2. Double-entry system and golden rules
- In the double-entry system, every transaction has two sides: a debit and an equal credit.
- It was first described by the Italian mathematician Luca Pacioli in 1494; he is called the father of accounting.
| Type of account | Golden rule |
|---|---|
| Personal account (persons, firms, banks) | Debit the receiver, credit the giver |
| Real account (assets, cash, goods) | Debit what comes in, credit what goes out |
| Nominal account (expenses, incomes, gains, losses) | Debit all expenses and losses, credit all incomes and gains |
3. Books and process of accounting
| Step / book | Meaning |
|---|---|
| Journal | Book of original entry; transactions recorded date-wise with debit and credit |
| Ledger | Book of final entry; all transactions of one account grouped together |
| Cash book | Records all cash (and bank) receipts and payments |
| Trial balance | List of all ledger balances to check that total debits equal total credits |
| Trading and profit and loss account | Shows gross profit and net profit or loss for the period |
| Balance sheet | Statement of assets, liabilities and capital on a given date |
Order: transaction → journal → ledger → trial balance → final accounts.
4. Other useful concepts
- Cash basis records income and expenses only when cash is received or paid; accrual basis records them when earned or incurred.
- A bank reconciliation statement explains differences between the cash book balance and the bank statement balance.
- Gross profit = sales − cost of goods sold; net profit = gross profit − other expenses + other incomes.
- An audit is an independent check of accounts.
5. Worked example: from journal to trial balance
An office or business makes three transactions. Each is recorded in the journal with a debit and a credit of the same amount.
| Transaction | Debit | Credit | Rule used |
|---|---|---|---|
| Started business with cash Rs 50,000 | Cash A/c 50,000 | Capital A/c 50,000 | Real: debit what comes in; personal: credit the giver |
| Bought furniture for cash Rs 10,000 | Furniture A/c 10,000 | Cash A/c 10,000 | Real: debit what comes in, credit what goes out |
| Paid rent Rs 5,000 | Rent A/c 5,000 | Cash A/c 5,000 | Nominal: debit expenses |
After posting to the ledger, Cash shows Rs 35,000 debit, Furniture Rs 10,000 debit, Rent Rs 5,000 debit and Capital Rs 50,000 credit. The trial balance totals Rs 50,000 on both sides, which shows the arithmetic is correct.
6. Common mistakes
- Debiting the giver instead of the receiver in a personal account.
- Treating capital as an asset: it is a liability of the business to the owner.
- Thinking a balanced trial balance means there are no errors: errors of omission or compensating errors can still exist.
- Confusing capital expenditure (furniture) with revenue expenditure (rent).
7. How this topic is asked in the exam
Kharidar and Nayab Subba papers ask the golden rules, the meaning of terms such as journal, ledger, trial balance and depreciation, and simple journal entries. Practise writing three or four entries with debit and credit and a short narration, because a full entry often carries two or more marks.
📌 Key points to remember
- Assets = Liabilities + Capital.
- Double entry: every debit has an equal credit; Luca Pacioli (1494) is the father of accounting.
- Personal: debit receiver, credit giver.
- Real: debit what comes in, credit what goes out.
- Nominal: debit expenses and losses, credit incomes and gains.
- Journal is the book of original entry; ledger is the book of final entry.
- Trial balance checks that debits equal credits.
- Balance sheet shows assets, liabilities and capital on a date; depreciation is the fall in value of fixed assets.
Test yourself: Basic Accounting Terms
50 questions check what you read about Key terms, Books and process of accounting and Other useful concepts. Each attempt picks 25 at random.