The serious case of "Accounting"

Accounting - the language of business - is something which I am not comfortable with.I thought this as a boring subject,never be to digest fully.But the first 2-3 session at IIMB changed my posture.My hostile state of mind started tuning towards P&L,Balance sheet,Income sheet etc.

As Prof M S Narasimhan put this - Accounting deals with communicating,measuring and recording business data,in other words accounting just record "MONETARY" transaction.Anything that is not MONETARY is of no importance to accountants.

Lets see the main "equation" in accounting:

Asset = Liabalities + Equity(Capital)

What does this mean?

Consider you want to start a business of say : Bobby's Sweet Shop.

What you need? You need

1. You need Cash of say 25000.


2. A shop which you need to pay rent (advane of 700/- and 2 months rent 600)


3. You need some inventories like chair,table etc (say about 1000 )


4. You need furnitures and fixtures (200/-)


5. You may need some loan from SBI (20000 Loan )


6. May be you can hire/lease some stuff from your friends (inventory of 1000)


7. May be you can get some on "DONATION". P.S: No item in accounting goes without getting recorded (worth 300/-)


8. Of course you need to pay salaries (of 2000)


9. Once shop opened,you will get orders and sell some sweets (income of 500/- expense 300)
   
10. You may take some profit(earnings,income) from this (Retained earning :200)


11. You need to pay back the money you are liable to SBI bank (you repay 1500/- of it)

All these you need to record.Why?

• Becuase you need to know how the things going?


• SBI need to know (can they do future business)


• Friends need to know (they have a stake)


• Govt need to know (Taxation)

Now lets talk about a "sheet" where you capture all these...

It is none other than the BALANCE SHEET.

It has one issue - it will not be aailable in monthly/weekly basis - it will be "GENERALLY" prepared on a annual basis.

C'mon,Lets prepare a balance sheet for "Bobby's Sweet Shop"