You bought a bike for ₹80,000 two years ago. Today the same bike sells for ₹50,000 second-hand. But in YOUR diary (books), you still write ₹80,000 (minus some wear-and-tear deduction called depreciation). Why? Because ₹80,000 is a FACT — you have the bill! But ₹50,000 is just an OPINION — someone might pay more, someone might pay less. Accounting prefers facts over opinions.

Key points: Fixed assets stay at purchase cost. No recording of “unrealised gains” (profit you haven’t actually earned). Depreciation reduces the book value gradually — but NOT to match market price. It just spreads the cost over the asset’s useful life.

Your company’s star salesman is brilliant — but accounting doesn’t record “Raju is an amazing salesman.” Why? Because you can’t put a rupee value on talent. But if Raju brings in a ₹50 lakh order — THAT gets recorded because it’s in rupees.

Similarly, if the boss is sick — that’s not recorded. But if his illness causes the company to lose ₹10 lakh in business — the ₹10 lakh loss IS recorded. Another limitation: ₹100 today is not worth the same as ₹100 ten years ago (because of inflation). But accounting IGNORES this and treats every rupee as equal, regardless of when it was earned.

Ramesh owns a grocery shop. He takes ₹5,000 from the shop’s cash box to pay his daughter’s school fees. In the shop’s books, this is recorded as “Drawings” — meaning Ramesh TOOK money from the business. The shop and Ramesh are treated as two DIFFERENT people in accounting, even though Ramesh owns the shop!

Why? Because if we mix personal and business money, we’ll never know if the SHOP is making profit or loss. Capital that Ramesh puts IN = business OWES it to Ramesh (liability). Money Ramesh takes OUT = Drawings. Profit = belongs to Ramesh (liability to owner). Even a one-person shop follows this rule in accounting.

Why does this matter? If you thought your shop would close next month, you’d sell everything at whatever price you can get (liquidation value). But since we ASSUME the business will continue, we keep assets at their buying price, spread depreciation over years, carry forward balances, and create reserves for the future.

Ind AS-1 says: Management must check if the business can continue running. If it CAN’T — they must disclose this fact and explain WHY. Exception: companies created for one specific project (like building a bridge) — they dissolve after the project is done. These are NOT treated as going concerns.

This is the “PLAY SAFE” rule. If a customer MIGHT not pay you back, create a provision for doubtful debts (set aside money for the possible loss). If your stock’s market value has fallen below what you paid, value it at the LOWER price. If there’s a court case against you, provide for the possible penalty.

BUT — if you MIGHT win a lottery or a court case — do NOT record it as income until you ACTUALLY win! Possible losses = ALWAYS provide. Possible gains = NEVER record until certain.

The famous rule: “Anticipate no profit, provide for all possible losses.”

This is the heart of accounting. You buy a chair for ₹5,000 cash. Two things happened: (1) You GOT a chair, (2) You LOST cash. Both must be written. Chair account goes UP by ₹5,000. Cash account goes DOWN by ₹5,000. The total always balances: Assets = Capital + Liabilities.

The old “Single Entry” system only records one side — like writing “bought chair” but not noting that cash reduced. It’s incomplete, unreliable, and used only by very small businesses. Double Entry is the standard because it’s scientific, prevents fraud, and allows you to prepare a Trial Balance (check: do debits = credits?).

Cash Basis: Record income only when cash comes into your hand. Record expense only when cash goes out. Simple but INCOMPLETE — because sometimes you earn money but haven’t collected it yet, or you owe money but haven’t paid yet.

Accrual Basis: Record income when you EARN the right to receive it (even if cash hasn’t come). Record expense when the OBLIGATION to pay arises (even if you haven’t paid yet). Example: You worked for a client in March but he’ll pay in April. Under accrual, you record the income in MARCH (when you earned it), not April (when cash came).

Ind AS-1 says: All financial statements must use the ACCRUAL basis (except the Cash Flow Statement). This is the law for all companies.