Monday, 12 September 2016

Accounts

  • To keep a company's financial data organized, accountants developed a system that sorts transactions into records called "Accounts".
  • When a company's accounting is setup, the accounts most likely to be effected by company's transactions are identified and listed out.This list is referred to as the company's "chart of accounts". 
Types of Accounts:
Every Transaction will have two aspects. Which are:
  • Giving
  • Receiving

Personal Account:

  • The accounts which represents persons and organisations.
  • For example, Partnership account, Bank Account, Capital account.
Example:

The transaction below demonstrates the interaction between two different personal accounts, one of which is a private limited company and the other one is a bank.
  • Paid Unreal Pvt Ltd. 24,000 by check
  • The amount will be 24,000 in both debit and credit.
Accounts Involved Debit/Credit Rule Applied
Unreal Pvt Ltd. A/C Debit Artificial personal so a/c Dr. the receiver
To Bank A/CCredit Artificial personal so a/c Cr. the giver
Real Account:
  • Asset accounts and liability accounts comes under this type of account.
  • Example for Asset accounts are land, building, cash, inventory etc.
  • Example for Liability accounts are loans, accounts payable etc.
Example:

The transaction below demonstrates the interaction between two different real accounts: one is furniture and other is cash, both of them are assets of the company and hence classified as real accounts.
  • Purchased furniture for 10,000 in cash
  • The amount will be 10,000 in both debit and credit.
Accounts Involved Debit/Credit Rule Applied
Furniture A/C Debit Furniture is real a/c so Dr. What comes in
To Cash A/CCredit Cash is real a/c so Cr. What goes out

Nominal Account:
  • These are accounts of expenses & losses which a business suffer and income & gains which a business earn in the course of business. 
  • For Example, salaries, taxes, rent account, interest account etc.
Example:

The following example shows a transaction where a nominal account deal with real account.
  • Purchased goods for 15,000 in cash
  • The amount will be 24,000 in both debit and credit.
Accounts Involved Debit/Credit Rule Applied
Purchase A/C Debit Nominal a/c so Dr. all expenses
To Cash A/CCredit Real a/c so Cr. what goes out

Golden Rule for all in shortcut method:

Type Increase Decrease
Asset Debit Credit
Liability Credit Debit
Expense Debit Credit
Income Credit Debit