New to accounting? Start here
This page explains the ideas that every other page builds on. It takes about ten minutes to read.
What is accounting?
Accounting is recording what a business does with money, then summarising it so people can see how the business is doing. Owners, banks, investors and HMRC all read accounts to make decisions: whether to lend money, invest, or how much tax is due.
In accounting, the business is always treated as separate from its owner. If the owner takes £100 out of the business for themselves, that is £100 leaving the business, even though it is the owner’s money in the end.
The three main reports
At the end of each year, a company produces three main reports. A sole trader usually only needs the first two.
| Report | What it shows | Think of it as |
|---|---|---|
| Income statement (statement of profit or loss) | Income, expenses and profit for the whole year | A video of the year |
| Statement of financial position (balance sheet) | What the business owns and owes on the last day of the year | A photo on one day |
| Statement of cash flows | Where cash came from and where it went during the year | A bank statement for the whole business |
Why a separate cash report? Profit isn’t the same as cash. A business can make a profit while its bank balance falls, for example if customers haven’t paid yet or it has bought new equipment. More businesses fail because they run out of cash than because they make a loss.
Double entry in one sentence
Every transaction changes two things, so it is recorded twice: once on the left side of one account (a debit) and once on the right side of another (a credit), for the same amount.
Example. The business buys a laptop for £800 cash. It gains a laptop worth £800 and loses £800 of cash. Two changes, two entries: debit Equipment £800, credit Cash £800.
Because every debit has a matching credit, the books always balance. That is how accountants check their work.
The five types of account
| Type | In plain English | Examples |
|---|---|---|
| Asset | Things the business owns or is owed | Cash, stock, vans, money customers owe |
| Liability | Things the business owes | Loans, unpaid supplier bills |
| Equity (capital) | The owner’s share | Money the owner put in, profit kept |
| Income | Money the business earns | Sales, rent received |
| Expense | Costs of running the business | Rent, wages, electricity |
Key words
- Transaction
- Any event involving money: a sale, a purchase, a payment.
- Debit (Dr)
- The left side of an account.
- Credit (Cr)
- The right side of an account.
- On credit
- Bought or sold now, paid for later.
- Trade receivables
- Money customers owe the business (also called debtors).
- Trade payables
- Money the business owes its suppliers (also called creditors).
- Inventory
- Goods held to sell (stock).
- Revenue
- Money earned from sales.
- Profit
- Income minus expenses.
- Drawings
- Money the owner takes out for personal use.
- Depreciation
- Spreading the cost of a long-lasting asset over the years it is used.
- Financial year
- The 12-month period the accounts cover, often ending 31 December or 31 March.
The order to work through
- The accounting equation: why the books always balance.
- Debits, credits and account types: which side each entry goes on.
- Journal entries: writing transactions down.
- T-accounts: posting them to the accounts.
- Trial balance: checking that everything balances.
- Accruals and prepayments and depreciation: year-end adjustments.
- Income statement and statement of financial position: the final reports.
- Statement of cash flows: where the cash went.
- Ratios and IFRS standards: Year 3 analysis and rules.
- Industry ready: audit, practical bookkeeping, group accounts and interview prep for graduate roles.
- On the job: realistic work simulations based on the tasks you’ll do in your first year.
Each topic page starts with a plain-English section called “New to this topic?”. Read that first, then the lesson, then try the questions. If you get one wrong, press Show answer to see the working and an explanation.