Accounting Basics
Understanding a few basic accounting concepts makes it much easier to work with Frappe Books. Every transaction recorded in the system affects your financial statements and follows the principles of double-entry bookkeeping.
This guide explains the fundamental account types, how business transactions affect them, and the relationship between credits and debits.
Tip
Every transaction in Frappe Books affects at least two accounts. This is the foundation of double-entry bookkeeping.
Example Business Scenario
Consider a newly established home interior business that performs the following transactions:
- The owner invests ₹5,00,000 as business capital.
- The business pays ₹40,000 as monthly office rent.
- The business completes its first sale worth ₹30,000.
- A web agency builds the company website for ₹50,000, payable after two months.
These transactions illustrate how money moves through different accounts while maintaining balanced books.
Business Events
| Event | Amount |
|---|---|
| Owner Investment | + ₹5,00,000 |
| Office Rent | – ₹40,000 |
| Sales Income | + ₹30,000 |
| Accounts Payable | – ₹50,000 |
Five Types of Accounts
Every financial transaction belongs to one or more of the following account categories:
| Account Type | Example Balance |
|---|---|
| Assets | Bank Balance — ₹4,90,000 |
| Liabilities | Accounts Payable — ₹50,000 |
| Equity | Owner Investment — ₹5,00,000 |
| Income | Sales — ₹30,000 |
| Expenses | Rent — ₹40,000 |
How Transactions Affect Accounts
Owner Investment
When the owner contributes capital to the business:
- The Bank Account (Asset) increases.
- The Owner’s Equity increases because the business now owes that value to its owner.
| Account | Debit | Credit |
|---|---|---|
| Bank Account | ₹5,00,000 | – |
| Owner’s Equity | – | ₹5,00,000 |
Rent Payment
Paying office rent:
- Increases the Rent Expense.
- Reduces the Bank Account.
| Account | Debit | Credit |
|---|---|---|
| Rent Expense | ₹40,000 | – |
| Bank Account | – | ₹40,000 |
Sales Income
Receiving payment from a customer:
- Increases the Bank Account.
- Increases the Sales Income.
| Account | Debit | Credit |
|---|---|---|
| Bank Account | ₹30,000 | – |
| Sales Income | – | ₹30,000 |
Accounts Payable
Hiring a vendor with payment due in the future:
- Creates a liability under Accounts Payable.
- Records the corresponding business expense.
| Account | Debit | Credit |
|---|---|---|
| Expense Account | ₹50,000 | – |
| Accounts Payable | – | ₹50,000 |
Double-Entry Bookkeeping
Every accounting transaction affects at least two accounts. The total debit value always equals the total credit value, ensuring that your books remain balanced.
You can observe this in Frappe Books by creating a transaction such as a Sales Invoice and reviewing the corresponding entries in the General Ledger Report.
Understanding Credits and Debits
The meaning of a debit or credit depends on the type of account involved.
| Account Type | Debit | Credit |
|---|---|---|
| Assets | Increase | Decrease |
| Expenses | Increase | Decrease |
| Liabilities | Decrease | Increase |
| Income | Decrease | Increase |
| Equity | Decrease | Increase |
Remember AEDLIC
A simple way to remember the debit and credit rules is the abbreviation:
AEDLIC
- Assets → Debit increases
- Expenses → Debit increases
- Liabilities → Credit increases
- Income → Credit increases
Related Features
- Chart of Accounts
- Journal Entries
- General Ledger
- Sales Invoices
- Opening Balances
Best Practices
- Understand the five account types before recording transactions.
- Verify that every transaction affects at least two accounts.
- Review the General Ledger to understand how transactions are recorded.
- Remember the AEDLIC rule to determine when to debit or credit an account.
- Regularly reconcile your accounts to maintain accurate financial records.
