Business Transaction: An Economic activity that affects financial position of the business and can be measured in terms of money e.g., expenses etc.

Account : Account refers to a summarized record of relevant transactions of particular head at one place. All accounts are divided into two sides. The left side of an account is called debit side and the right side of an account is called credit side.

Capital: Amount invested by the owner in the firm is known as capital. It may be brought in the form of cash or assets by the owner.

Drawings: The money or goods or both withdrawn by owner from business for personal use, is known as drawings. Example: Purchase of car for wife by withdrawing money from business.

Assets: Assets are valuable and economic resources of an enterprise useful in its operations. Assets can be broadly classified as:

1. Current Assets: Current Assets are those assets which are held for short period and can be converted into cash within one year. For example: Debtors, stock etc.

2. Non-Current Assets: Non-Current Assets are those assets which are hold for long period and used for normal business operation. For example: Land, Building, Machinery etc. They are further classified into:

(a) Tangible Assets: Tangible Assets are those assets which have physical existence and can be seen and touched. For Example: Furniture, Machinery etc.

(b) Intangible Assets: Intangible Assets are those assets which have no physical existence and can be felt by operation. For example: Goodwill, Patent, Trade mark etc.

Liabilities: Liabilities are obligations or debts that an enterprise has to pay after some time in the future.

Liabilities can be classified as:

1. Current Liabilities: Current Liabilities are obligations or debts that are payable within a period of one year. For Example: Creditors, Bill Payable etc.

2. Non-Current Liabilities: Non-Current Liabilities are those obligations or debts that are payable after a period of one year. Example: Bank Loan, Debentures etc.

While preparing an account if the debit side is greater than the credit side, the difference is called “Debit Balance”. So, if Debit Side > Credit Side, it is a debit balance.

When the credit side is greater than the debit side the difference is called “Credit Balance”. So, if Credit Side > Debit Side, it is a credit balance.

The Ledger is the main or Principal book of accounts in which all the business transactions would ultimately find thier place under various accounts in a duly classified form.

By this classification / collective effect we are able to know the following –

• How much amount is due from each customer and how much amount the firm has to pay to each supplier/ creditor.
• The amount of Purchase and Sales during a particular period.
• Amount paid or received on account of various items.
• Ultmate position of Assets and Capital.
• For the preparation of Trial Balance which helps in ascertaining the Arithmatic Accuracy of the Accounts.

Ledger is also called the Principal Book of Accounts

1. To prepare a trial balance we need the closing balances of all the ledger accounts and the cash book as well as the bank book. So firstly every ledger account must be balanced. Balancing is the difference between the sum of all the debit entries and the sum of all the credit entries.
2. Then prepare a three column worksheet. One column for the account name and the corresponding columns for debit and credit balances.
3. Fill out the account name and the balance of such account in the appropriate debit or credit column
4. Then we total both the debit column and the credit column. Ideally, in a balanced error-free Trial balance these totals should be the same
5. Once you compare the totals and the totals are same you close the trial balance. If there is a difference we try and find and rectify errors. Here are some cases that cause errors in the trial balance

• A mistake in transferring the balances to the trial balance
• Error in balancing an account
• The wrong amount posted in the ledger
• Made the entry in the wrong column, debit instead of credit or vice versa
• Mistake made in the casting of the journal or subsidiary book

Accounting equation signifies that the asset of a business are always equal to the total of capital and liabilities. A business transaction will result in the change in either of the asset, liabilities or capital of the firm and even after the change the asset will be again equal to the total of capital and liabilities. if a business transaction results in the increase of assets, there will also be a corresponding increase in the amount of either capital or liabilities by the same amount.
Example-
Ram started business with rs 75000 as capital.
Ans- Asset=liability+capital

cash = liabilities+capital
75000= 0 + 75000

Liquid Assets: Liquid Assets are those which are already in the form of cash or can easily be convertible into cash and has a negligible effect on the price available in the market. For example marketable securities, government bonds, certificates of deposits etc.

Cheques issued but not presented.
bank charges deduced by bank.
bank paid the dues as per standing instructions.
wrong debit in cash book.
wrong credit in pass book.

Recording of capital contribute by the owner as liability ensures the adherence of

 Separate Entity  OR Business entity concept.

It means that personal transactions of owners are treated separately from those of the business.