A small primer to get you up to speed on the concepts of accounting.
Let's understand the concept of accounting with the example of an imaginary
business that is just starting out.
Let’s say we’re starting a Home Interior business and we have ₹5,00,000 of
capital to start our business. Now the business has ₹5,00,000 in its bank.
Now we will need an operating place where we can work and meet clients. We rent
out a co-working space for ₹40,000 per month. This is our first expense. Our
bank balance will be ₹5,00,000 - ₹40,000 = ₹4,60,000 at this point.
We have invested some cash, we have a working place and now we have our first
sale. We earned ₹30,000 from our first customer. This is our first income. Our
bank balance at this point will be ₹4,60,000 + ₹30,000 = ₹4,90,000.
Let’s say we decided to hire a Web Agency to build a website for us, they charge
₹50,000 which will be paid after 2 months from current date. At this point we
haven’t paid them any money, but we are liable to pay them in the future. This
is a liability and will be recorded under Accounts Payable.
Let’s list these down in a table:
Now, let's categorize these into the five types of Accounts:
Asset (Bank): ₹4,90,000
Liabilities (Accounts Payable): ₹50,000
Equity (Owner Investment): ₹5,00,000
Income (Sales): ₹30,000
Expense (Rent): ₹40,000
Impact of accounting on accounts
Let’s take a look at each transaction and understand which accounts will get
affected, from an accounting point-of-view:
1. Cash Investment
Since you, the owner, invested money into the business, it is a liability.
So, Account Payables, which is a Liability account, is increased by
Also, the money in the Bank Account, which is an Asset account, is increased
Rent is an immediate expense, so it is recorded in the Rent Account, which is
an Expense account, it is increased by ₹40,000.
Also, the money is spent from the Bank Account, which is an Asset account, it
is decreased by ₹40,000.
3. First Sale
We got an immediate payment, it is recorded in Sales Account, which is an
Income account, the balance is increased by ₹30,000.
Also, we received the money in our Bank Account directly, so it’s balance
increases by ₹30,000.
4. Hiring a Web Agency
We hired a Web Agency for some work, and we are liable to pay them in the
future. This is recorded in Accounts Payable by increasing the amount by
Since this is an expense for us, we also increase the balance in the Vendor
Expense Account by ₹50,000.
As you might have noticed, every transaction we do in our business affects two
accounts. This is the basis of double-entry bookkeeping system.
You can test this out by creating a Sales Invoice in Frappe Books, and then
check the General Ledger Report to see which accounts were affected.