Start with the accounting equation
Accounting records the resources a business controls, what it owes and the owner’s interest. In a simple introductory model, assets equal liabilities plus equity. A transaction changes at least two parts of the records, while this relationship stays in balance.
Consider a fictional service business whose owner invests ₹50,000 in cash. Cash is an asset and the owner’s capital is equity. The business then borrows ₹20,000 and buys equipment for ₹15,000 in cash. Ignore tax, interest and depreciation for this first example.
Worked example: borrowing is not sales income
| After the transaction | Cash | Equipment | Liabilities | Equity |
|---|---|---|---|---|
| Owner invests ₹50,000 | ₹50,000 | ₹0 | ₹0 | ₹50,000 |
| Business borrows ₹20,000 | ₹70,000 | ₹0 | ₹20,000 | ₹50,000 |
| Equipment bought for ₹15,000 | ₹55,000 | ₹15,000 | ₹20,000 | ₹50,000 |
Final assets: ₹55,000 + ₹15,000 = ₹70,000
Liabilities + equity: ₹20,000 + ₹50,000 = ₹70,000
The loan increases cash and a liability. It is not a sale and does not create revenue. Buying equipment exchanges one asset for another in this simplified example; it does not automatically make the entire purchase an expense for the period.
Turn the transactions into journal entries
| Transaction | Debit | Credit |
|---|---|---|
| Owner’s investment | Cash ₹50,000 | Capital ₹50,000 |
| Loan received | Cash ₹20,000 | Loan payable ₹20,000 |
| Equipment bought | Equipment ₹15,000 | Cash ₹15,000 |
Debits and credits describe the two sides of an entry. They do not mean “good” and “bad”, or always mean money coming in and going out. Identify the account and its type before choosing the side.
Check your understanding: what happens when ₹5,000 of loan principal is repaid?
Debit loan payable ₹5,000 and credit cash ₹5,000. Cash falls to ₹50,000 and liabilities fall to ₹15,000. Equipment and equity stay unchanged in this example.
Separate profit from cash flow
Suppose the business completes a ₹10,000 service on credit, with revenue recognised and no related expense in this simplified exercise. Revenue and a receivable increase by ₹10,000. The example’s profit rises, but the cash balance does not increase until the customer pays.
When the customer pays, cash replaces the receivable. Recording the same revenue again would double-count the service. This is why “the bank balance increased” and “the business earned profit” answer different questions.
For your next exercise, write three lines: the business event, the affected accounts and the reason for each entry. Then check that total debits equal total credits. Connect these foundations to CA practice or ACCA exam practice when you are ready.
References and course coverage
This introductory guide uses original fictional transactions. Accounting treatment in a real business depends on the applicable standards, facts and period. Explore the current Business Foundations and professional-course choices in NEUYI Commerce.