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In this article, I am going to explain the accounting in layman terms. Hope you find it useful.

Just Observe the following activities.

1. Mr.X Gets salary up on working as software employee of Google. Once salary has been credited he spends it for the purchase of goods and services, Children's education, Purchase of house etc. Don't you think Mr.X is performing the economic activity? The Answer is yes. He is playing the commercial operation by paying the consideration in the form of Money for acquiring them. Here the benefit is purely Individual.
2. Have you heard of Hyderabad Metro Rail which recently began it services and well received by the people of Hyderabad. Whether the services rendered by the Hyderabad Metro Rail Limited to the passengers who travelled through it is an Economic Actvitity or not? The answer is Yes. Here in this economic benefit - Who benefitted? It is Public at large - It is a Social Benefit.
3. So we can draw a concussion from the above two set of activities - Not all the economic activities are run for the individual economic benefit, such economic activity may create a social advantage too. 

So, How these Economic Activities are performed?

Economic Activities are performed through Transaction and Events. Let us understand what a Transaction and Event is.

The transaction is used to mean a Business / Performance of act / An agreement etc., While Event is used to denote a happening, as a consequence of operations, a result.

Let us understand the above two terms with an example.

Imagine Mr X has a business idea of starting a retail shop at the busy location of Hyderabad. He invests 10,00,000 for running a stationery business, and purchases goods worth 8,00,000 and sells for 9,50,000. He pays shop rent of 1,00,000 and finds that he has left goods worth of 1,00,000.

Mr X, In the above case, carries on Economic Activity. It is through some transactions and events. In the end, he eagers to know running a stationery business is profitable or not.

Sales : 9,50,000

Closing Stock : 1,00,000

Total : 10, 50 ,000

Purchases : 8,00,000

Shop Rent : 1,00,000

Total Expenses : 9,00,000

Surplus : 10,50,000-9,00,000 = 1,50,000

Now will see what the events and transactions in the above economic activity are?

1. Having a surplus of 1,50,000 & Closing stock of worth: 1,00,000 are events since they arise as a result of economic activity

2. Purchase of goods, Sale of assets, Investment of amount in the business, Paying shop rent are like Transactions.

Likewise, Every individual wants to keep a record of all transactions and events and to have adequate information to aid in decision making purpose [ Whether it is worth to run a business or not ].

Accounting has been developed to serve the above purpose as it deals with the measurement of economic activities involving inflow and outflow of financial resources, which helps to create useful information for decision making.

Accounting has a universal application for recording events and transactions of family functions to the functions of a national government. For now, concentrate on business activities conducted by companies/firms/ organisations etc.

The growth of the accounting discipline is closely related to the growth of the business world. Imagine for a while when the business of selling goods and rendering of services has stopped for a day around the globe Whether human being can be able to survive the day? The answer is No. So the business activities had hold importance in today's business world and interlinked with the people's well being and survival.

Accounting as a field of study is best identified with recording and summarising economic activities in the form of transactions and events in the books of accounts/records and communication of financial information about business enterprises to the interested users to facilitate decision making.

Accounting aims to fulfil the needs of the rational and sound decision makers. So It acts as a medium for communication of financial information to users. Thus accounting is called a language of the business.

This covers a portion from the second chapter of Accounting Module 1 of CA Foundation- Accounting Process. This is equally applicable for students who are beginners in accountancy.

In this, we will learn – what is books of accounts, Accounting Equation and Basic Accounting Procedure, that is “Journal Entries.”

Double Entry System.

Dual Entry System for bookkeeping was first advocated by Luca Pashioli, an Italian mathematician about 500 years ago in 1494.

It says, every transaction has two aspects, DEBIT & CREDIT, wherein both aspects have the same value. That is, one is a debit entry, and the other is credit entry.  

•     Debit to denote an entry on the left side of an account. It is written as Dr.
•     Credit to denote an entry on the right side of an account. It is written as Cr.

You should Give proper attention while learning debit and credit aspects as it is the basics of accounting.

Under debit aspect, you have, expenses, losses and assets.

Under Credit aspect, you have income, gain, Liability & Capital.

Accounting Equation.

The fundamental accounting equation is Assets=Liabilities+ Capital.

Let us analyse this equation.

•     Assets-Assets are things of value owned by the business. Assets are classified as fixed assets and current assets. Fixed assets are purchased for operating the business and not for resale like land, building etc. Current assets are those which are kept for a short term for converting into cash or for resale. Example, stock, cash, debtors etc.
•     Capital means the Amount invested in a firm. It is also known as owner’s equity or net worth. As per the entity concept, the owner of the business is considered as a separate person. That means, for the firm, capital is liability towards the owner.
•     Liability means the amount which the firm owes to outsiders. Generally which are payable within one year are treated as a short-term like creditors, bank overdrafts etc.

If the term exceeds one year like debentures, they are treated as a long-term liability.

Basic Accounting Procedure - “ Journal Entries”.

Under the traditional approach, accounts can be classified as personal accounts, real accounts and nominal accounts. Personal accounts relate to persons such as debtors, creditors etc.

Real accounts represent both tangible and intangible assets of a business. Nominal accounts relate to income, expenses, gains and losses such as interest paid. The commission received etc.

  Golden Rule to Traditional Approach are:

•     In case of Personal Accounts,

        Debit the receiver, credit the giver,

•     Real Accounts,

        Debit what comes in, credit what goes out,

•     Nominal Accounts,

        Debit all expenses and losses and credit all incomes and gains.

Now we are not using the traditional approach. As per Modern Approach of accounting, a transaction is recorded as:

•     Assets, Losses or expenses are debited for an increase in value and credited for the decrease.
•     Income, gain, Liabilities and capital are credited for the increase in value and debited for the decrease.

We saw the rules of Modern Approach to Accounting. You are also required to give proper care while drawing the journal format also. It should contain the columns for Date, Particulars, Debit and Credit and a proper narration to explain the nature of the transaction. If the date is not available in the question, you may use serial numbers.

Now, Let us see how to draft Journal Entries.

•     Commenced business with rupees fifty thousand.- We have to decode this transaction as what is debit and what is credit. The first aspect is Cash which is coming into business (or bank if it a deposit in the bank account) and the second aspect is the capital. Cash is an asset. To show an increase in value, cash is debited. On the other hand, capital is shown in credit side to indicate an increase in value.
•     Purchase of computer for rupees twenty thousand- Computer is an asset. There is an increase in the value of computer. Hence it needs to be debited. Likewise, cash is reducing, or your bank balance is reducing when you are making a purchase. To show the reduction in value of an asset, it needs to be credited.
•     Goods purchased for rupees five thousand or in other words, Cash purchases for rupees five thousand- When there is the purchase of goods, we use the term “Purchases” instead of goods. This is a regular expense for a business. To show the increase in expenses, the “Purchases account” is debited. To show the decrease in cash or bank balance it is credited.

Hope this write up is useful in understanding the basic concepts of accounting. This will be effective if you perform the practical questions also.

i. Break Even Point: The break–even point (BEP) or break–evenlevel represents the sales amount in either unit (quantity) or revenue (sales) terms that is required to cover total costs, consisting of both fixed and variable costs to the company. Total profit at the break-even point is zero.

ii. Expense Behavior: At the heart of break-even point or break-even analysis is the relationship between expenses and revenues. It is critical to know how expenses will change as sales increase or decrease. Some expenses will increase as sales increase, whereas some expenses will not change as sales increase or decrease.

a. Variable Expenses: Variable expenses increase when sales increase. They also decrease when sales decrease.

At Oil Change Co. the following items have been identified as variable expenses. Next to each item is the variable expense per car or per oil change:

The other expenses at Oil Change Co. (rent, heat, etc.) will not increase when an additional car is serviced.

For the reasons shown in the above list, Oil Change Co.’s variable expenses will be $9 if it services one car, $18 if it services two cars, $90 if it services 10 cars, $900 if it services 100 cars, etc.

b. Fixed Expenses: Fixed expenses do not increase when sales increase. Fixed expenses do not decrease when sales decrease. In other words, fixed expenses such as rent will not change when sales increase or decrease.

At Oil Change Co. the following items have been identified as fixed expenses. The amount shown is the fixed expense per week:

c. Mixed Expenses: Some expenses are part variable and part fixed. These are often referred to as mixed or semi-variable expenses. An example would be a salesperson’s compensation that is composed of a salary portion (fixed expense) and a commission portion (variable expense). Mixed expenses could be split into two parts. The variable portion can be listed with other variable expenses and the fixed portion can be included with the other fixed expenses.

iii. Revenues or Sales: Revenues (or sales) at Oil Change Co. are the amounts earned from servicing cars. Oil Change Co. charges one flat fee of $24 for performing the oil change service. For $24 the company changes the oil and filter, adds needed fluids, adds air to the tires, and inspects engine belts.

At the present time no other service is provided and the $24 fee is the same for all automobiles regardless of engine size.

As the result of its pricing, if Oil Change Co. services 10 cars its revenues (or sales) are $240. If it services 100 cars, its revenues will be $2,400.

iv. Desired Profit In Units Let’s say that the owner of Oil Change Co. needs to earn a profit of $1,200 per week rather than merely breaking even. You can consider the owner’s required profit of $1,200 per week as another fixed expense. In other words the fixed expenses will now be $3,600 per week (the $2,400 listed earlier plus the required $1,200 for the owner). The new point needed to earn $1,200 per week is shown by the following break-even formula:

Always check your calculations:

The above schedule confirms that servicing 240 cars during a week will result in the required $1,200 profit for the week.

v. Break-even Point In Sales Dollars: One can determine the break-even point in sales dollars (instead of units) by dividing the company’s total fixed expenses by the contribution margin ratio.

The contribution margin ratio is the contribution margin divided by sales (revenues). The ratio can be calculated using company totals or per unit amounts. We will compute the contribution margin ratio for the Oil Change Co. by using its per unit amounts:

The break-even point in sales dollars for Oil Change Co. is:

The break-even point of $3,840 of sales per week can be verified by referring back to the break-even point in units. Recall there were 160 units necessary to break-even. At $24 per unit the necessary sales in dollars would be $3,840.

vi. Desired Profit In Sales Dollars: Let’s assume a company needs to cover $2,400 of fixed expenses each week plus earn $1,200 of profit each week. In essence the company needs to cover the equivalent of $3,600 of fixed expenses each week.

Presently the company has annual sales of $100,000 and its variable expenses amount to $37,500 per year. These two facts result in a contribution margin ratio of 62.5%:

The amount of sales necessary to give the owner a profit of $1,200 per week is determined by this break-even point formula:

To verify that this answer is reasonable, we prepared the following schedule:

As you can see, for the owner to have a profit of $1,200 per week or $62,400 per year, the company’s annual sales must triple. Presently the annual sales are $100,000 but the sales need to be $299,520 per year in order for the annual profit to be $62,400.

With effective from 1st April, 2017, no person shall receive an amount ofRs 2 Lakh or more; (A) in aggregate from a person in a day (or)(B) in respect of a single transaction (or)(C) in respect of transactions relating to one event or occasion from a person.

A.Single Person: Cash Receipt of Rs 2 lakh or more, from asingle person in a day is not allowed even if the amount has been paid through multiple transactions during the day which are below Rs 2 lakh. For example: Mr Viratbuys a gold chain worth Rs 2 Lakh and pays the amount by cash to Mr Sonesh on a single day in 4 equal installments of Rs 50,000 each. As Mr Sonesh accepted cash worth Rs 2 Lakh from a single person and in a single day, section 269ST is applicable in this case. Sonesh has to pay a penalty of Rs 2 Lakh.

B. Single Transaction:
Cash receipts of Rs 2 Lakh or more which are related to a single transaction are prohibited.For example: Mr Kejriwal goes through a medical surgery and the hospital charges him a bill of Rs 4 Lakh. Kejriwal clears the bill in 4 installments of Rs 1 Lakh each on four different dates. Here, the cashreceipts got by hospital are less than Rs 2 Lakh and have been received on different dates. Whether this transaction violates section 269ST? – Yes. Hospital has to pay the penalty. Because, they received the payments with respect to single bill / transaction. So, splitting of payments over several days is prohibited.

C. Single Event / Occasion:
Cash transactions or cash receipts related to a single event or occasion, can not be more than Rs 2 Lakh. For example: Nagachaitanya gets married to Samantha. On their wedding occasion, their relatives gifted Cash amount worth Rs 10 Lakh on different dates. Even if we assume that each person has gifted cash worth less than Rs 2 Lakh, are these receipts come under the purview of Section 269ST? Is penalty applicable? Yes, penalty can be levied. Here, marriage is a ‘single occasion’ and cash gifts worth Rs 2 Lakh or morecan not be received from relatives and other persons.

 The ‘One Nation One Tax’ slogan isn’t just about uniform rate, it is also about removing check posts at borders, which often clog traffic for hours, delaying shipment of goods.

While several states have been proactive in removing check posts voluntarily, many more are expected to dispense with the posts for commercial taxes on Saturday when the goods and services tax (GST) kicks in.

On Wednesday, the Bihar cabinet decided to stop checking of vehicles by commercial taxes department at six integrated border check posts and Madhya Pradesh too will do away with them.

Similarly, Karnataka CM Siddaramaiah has announced in the assembly that check posts will have no place in the GST regime but he did not specify the date.

What is, however, eye catching is that several states  from the “progressive ones” such as Gujarat, Maharashtra, Haryana, Rajasthan and Chattisgarh to UP, West Bengal and Odisha have done away with check posts.

UP was among the first ones dismantle its check posts in August 2008, while Bengal did so three years ago and Gujarat two years ago under Anandiben Patel.

But will this make life simple for truckers?

“Check- posts will not go away per se. Rather, checking of vehicles by only commercial taxes department officials would be stopped in adherence to rollout of GST,” said a Bihar government officer.

In Karnataka, the role of the physical verification centres will be to stop trucks and verify if the goods are as declared on the GSTN web portal.

Check posts virtually did the same job and officers suggested this system will continue till the replacement in the form of Electronic Way Bills takes off.

Among those who have done away with the border, UP has a similar system in the form of the mobile or flying squads, whose number has only gone up and they play havoc at night.

As anyone driving into Noida from Delhi can tell you, there are lathi-wielding inspectors and employees from the commercial tax department, who often erect barricades and stop almost every commercial vehicle, often throwing the stick (quite literally).

During the day, they are a little more selective. And, this has not changed despite change of administration. So, in case of several states, check posts have been removed, only on paper.

E-Way Bills:

When discussions on transition to GST began, the Centre was keen on reforming the current system to ensure trucks can move across borders freely.

After all, road transport accounts for 65% of freight volume. Although road infrastructure has vastly improved, stoppages at the state borders, some of which are notorious such as the one between Assam and West Bengal have meant that average distance travelled by vehicles have remained constant for three years and are estimated to cost the economy around $6.6 billion (over Rs 40,000 crore), apart from loss of fuel, an IIM Calcutta study estimated.

Currently, all trucks must halt at state borders (with check posts), although only 1% were non-compliant with the documents required. As a result, the Centre backed a risk-based assessment and suggested E-Way Bills.