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Types of accounts

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Dr Khyati Boriya -BDS (MHA)
Dr Khyati Boriya -BDS (MHA)

The document discusses accounting concepts and the accounting cycle. It defines accounting as a tool for decision making. It distinguishes between financial and management accounting based on their users. It also describes the key components of the accounting cycle including journalizing transactions, the general journal, debit and credit rules, and how the double-entry system ensures equal debits and credits.

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Accounting DR Khyati Boriya
Accounting as an Aid to Decision Making • Accounting information is useful to anyone who makes decisions that have economic results. • Managers want to know if a new product will be profitable. • Owners want to know which employees are productive. • Investors want to know if a company is a good investment. • Creditors want to know if they should extend credit, how much to extend, and for how long. • Government regulators want to know if financial statements conform to requirements.
Financial and Management Accounting • The major distinction between financial and management accounting is the users of the information. – Financial accounting serves external users. – Management accounting serves internal users, such as top executives, management and administrators within organizations.
Accounting as an Aid to Decision Making • Fundamental relationships in the decision- making process: Event Accountant’s analysis & recording Financial Statements Users
Business Activities Operating Activities Investing Activities Financing Activities
The Balance Sheet Sections of the balance sheet: • Assets - resources of the firm that are expected to increase or cause future cash flows (everything the firm owns) • Liabilities - obligations of the firm to outsiders or claims against its assets by outsiders (debts of the firm) • Owners’ Equity - the residual interest in, or remaining claims against, the firm’s assets after deducting liabilities (rights of the owners)
The Balance Sheet The balance sheet equation: Assets = Liabilities + Owners’ Equity or Owners’ Equity = Assets - Liabilities
Balance Sheet Transactions • The balance sheet is affected by every transaction that an entity encounters. • Each transaction has counterbalancing entries that keep total assets equal to total liabilities and owners’ equity, i.e., the balance sheet equation must always be balanced.
TYPES OF ACCOUNTS
Types of Accounts Personal Accounts Impersonal Accounts Real Accounts Nominal Accounts
Classification of Accounts • Personal Account (Related to person or Individual) – Natural Persons’ Account – Artificial Persons’ Account – Representative Personal Account • Real Account (Related to Property, Possession or Liability) – Tangible Real Account – Intangible Real Account
Classification of Accounts • Nominal Account – Income – Gain – Loss – Expenses
Personal Accounts • Credit Transaction in a business are carried out with a living person, an institution or an artificial person. As a result of such transaction debtor – creditor (receiver or giver) relationship arises. – For e.g.(1) Urmila’s Accounts, (2) Rameshbhai’s Accounts, (3) Dena Bank’s Accounts (4)L.I.C.’s Accounts (5) Gujarat Electricity Board’s Accounts (6) Kadi Nagarpalika’s Accounts.
Real Accounts • The product traded in a business is known as goods. Separate accounts are maintained for incoming (Purchase) and outgoing (Sales) of goods.
Real Accounts 1) Goods A/c: Transaction related to the exchange of goods. For e.g. (a) Purchase A/c, (b) Sales A/c, (c) Purchase Returns A/c (d) Sales Returns A/c (e) Stolen Goods A/c (f) Goods withdrawn for personal use A/c (g) Goods destroyed by fire A/c (h) Goods given as free samples A/c (i) Goods given as charity A/c, etc.
Real Accounts 2) Assets Account: An item or a right owned by the business and having financial value is known as an asset. Such assets are useful for the proper running of the business.
Real Accounts (a) Fixed or long term Assets like land & building, machinery, furniture, vehicles, goodwill, patents, copyright, etc (b) Investments such as shares & debentures of Reliance Ind, Kisan Vikas Patra, Post office Savings, etc. (c) Current Assets A/c like Cash A/c, Stock A/c, Debtors A/c, etc.
Nominal Accounts Certain expenses have to be incurred for carrying on the business. There are various incomes also in the business. Such income & expenses a/c are known as Nominal Accounts
Nominal Accounts Accounts of expense include: Wages A/c, Cartage A/c, Postage & Telegram A/c, Salary A/c, Depreciation A/c, Electricity A/c, Discount allowed A/c, Bank Charges A/c, Advertisements Expense A/c, etc. Accounts of Income include: Interest received A/c, Discount received A/c, Dividend received A/c, Rent received A/c, Commission received A/c, Brokerage received A/c, etc.
Examples • Vishal’s A/c • Rent Paid A/c • Rent received A/c • Interest Received A/c • Building Account A/c • Machinery A/c • Purchase A/c (goods A/c) • Discount Allowed A/c • Sales A/c • Discount Received A/c
Examples • Cartage Paid • Harish A/c • Naresh A/c • Furniture A/c • Cash A/c • Bank A/c • Bank Overdraft • Commission received • Commission Paid • Bills Payable • Bills Receivable
Rules of Debit Credit Nominal AccountsReal AccountsPersonal Accounts (1)Debit expenses & losses (2)Credit incomes & gains (1)Debit what comes in (2)Credit what goes out (1)Debit the receiver (2)Credit the giver
Rules of Debit and Credit Debit Credit • Personal Account The Receiver The Giver • Real Account What Comes in What goes out • Nominal Account All losses and All gains and exp. Income
Type ofType of AccountsAccounts When to DebitWhen to Debit When to CreditWhen to Credit PersonalPersonal AccountAccount If the person receivesIf the person receives something from thesomething from the business, his account inbusiness, his account in the books of thethe books of the business is to be Debitedbusiness is to be Debited If the person giveIf the person give something to the business,something to the business, his account in the books ofhis account in the books of the business is to bethe business is to be credited.credited. Real AccountReal Account Account of goods orAccount of goods or assets coming into theassets coming into the business is to be debitedbusiness is to be debited Accounts of goods or assetAccounts of goods or asset going out of the businessgoing out of the business is to be Creditedis to be Credited NominalNominal AccountAccount Account of expense orAccount of expense or loss to be debitedloss to be debited Accounts of income or gainAccounts of income or gain to be Creditedto be Credited
The Double-Entry Accounting System • Businesses enter into thousands of transactions daily. – Accountants must carefully keep track of and record these transactions in a systematic manner. • Accountants use a double-entry accounting system, in which at least two accounts are always affected by each transaction.
The Double-Entry Accounting System • Each transaction must still be analyzed to determine which accounts are involved, whether the accounts increase or decrease, and how much the balance will change. • The balance sheet equation can be used for this analysis, but with so many transactions, this is not realistic. – In practice, accountants use ledgers.
RECORD TRANSACTIONS IN THE JOURNAL
Journal • Chronological record of the transactions • Consists of at least one debit and one credit
Journalizing Transactions • Identify each account affected and its type • Determine whether each account is increased or decreased. Use the rules of debit and credit • Record transaction in journal, including a brief explanation – Debit side of entry is entered first – Total debits should always equal total credits
General Journal Journal Page 1Journal Page 1 DateDate DescriptionDescription L.F.L.F. DebitDebit CreditCredit Jul 1Jul 1 CashCash 45,00045,000 Vishal’s CapitalVishal’s Capital 45,00045,000 Investment from ownerInvestment from owner Accounts AffectedAccounts Affected Amount of debits and credits Amount of debits and credits Explanation of transaction Explanation of transaction Transaction Date Transaction Date
General Journal Style conventions that must be followed: • Year is entered at the top of each page • The month is only entered for the first entry on a page unless the month changes in the middle of the page. The month may be abbreviated • Enter numerical date for each transaction, even if there are many entries on same date
General Journal • Debits are ALWAYS entered first in an entry. Use the EXACT account title and do not abbreviate • Credits are INDENTED and listed second • Do not use currency signs • SKIP A LINE between each entry • Never split an entry between two pages
Example Mr. Vishal brought cash Rs. 25000 in the business
Example Analysis of June 1 transaction: • Cash is increasing • Cash is real account • Real Account : Debit what comes in GENERAL JOURNALGENERAL JOURNAL DATEDATE DESCRIPTIONDESCRIPTION L.F.L.F. DEBITDEBIT CREDITCREDIT Jun 1 Cash 25,000
Example Analysis of June 1 transaction: • Mr. Vishal, is the giver of capital • Mr. Vishal is a human being • Personal A/c: Credit the giver GENERAL JOURNALGENERAL JOURNAL DATEDATE DESCRIPTIONDESCRIPTION L.F.L.F. DEBITDEBIT CREDITCREDIT Jun 1 Cash 25,000 Mr. Vishal’s Capital 25,000 Owner invested in business
Example • Purchased Medical supplies from Torrent Pharma Rs. 10000
Example Analysis of June 2 transaction: • Medical Supplies is coming into business • Medical Supplies is current asset • Real Account : Debit what comes in GENERAL JOURNALGENERAL JOURNAL DATEDATE DESCRIPTIONDESCRIPTION L.F.L.F. DEBITDEBIT CREDITCREDIT Jun 2 Medical Supplies 10,000
Example Analysis of June 2 transaction: • Torrent Pharma is supplier of goods • Torrent Pharma is an artificial person • Personal Account: credit the giver GENERAL JOURNALGENERAL JOURNAL DATEDATE DESCRIPTIONDESCRIPTION L.F.L.F. DEBITDEBIT CREDITCREDIT Jun 2 Medical Supplies 10,000 Torrent Pharma 10,000 Purchased medical supplies
Example • Rent Paid in Cash Rs. 4000
Example Analysis of June 2 transaction: • Rent is an Expense • Rent is a part of Nominal Account • Debit the expense GENERAL JOURNALGENERAL JOURNAL DATEDATE DESCRIPTIONDESCRIPTION L.F.L.F. DEBITDEBIT CREDITCREDIT Jun 2 Rent Expense 4,000
Example Analysis of June 2 transaction: • Cash is going out of the business • Cash is a part of real account • Credit what goes out GENERAL JOURNALGENERAL JOURNAL DATEDATE DESCRIPTIONDESCRIPTION L.F.L.F. DEBITDEBIT CREDITCREDIT Jun 2 Rent Expense 4,000 Cash 4,000 Rent paid in cash
Example • Service Rendered to Ramesh of Rs. 12000
Example Analysis of June 3 transaction: • Ramesh is receiving the services, Ramesh is a human being • Personal Account • Debit the receiver GENERAL JOURNALGENERAL JOURNAL DATEDATE DESCRIPTIONDESCRIPTION L.F.L.F. DEBITDEBIT CREDITCREDIT Jun 3 Ramesh 12,000
Example Analysis of June 3 transaction: • Service Revenue is coming in the business • Service Revenue is part of nominal account • Credit income & gains GENERAL JOURNALGENERAL JOURNAL DATEDATE DESCRIPTIONDESCRIPTION L.F.L.F. DEBITDEBIT CREDITCREDIT Jun 3 Ramesh 12,000 Service Revenue 12,000 Performed services

More Related Content

Types of accounts

  • 2. Accounting as an Aid to Decision Making • Accounting information is useful to anyone who makes decisions that have economic results. • Managers want to know if a new product will be profitable. • Owners want to know which employees are productive. • Investors want to know if a company is a good investment. • Creditors want to know if they should extend credit, how much to extend, and for how long. • Government regulators want to know if financial statements conform to requirements.
  • 3. Financial and Management Accounting • The major distinction between financial and management accounting is the users of the information. – Financial accounting serves external users. – Management accounting serves internal users, such as top executives, management and administrators within organizations.
  • 4. Accounting as an Aid to Decision Making • Fundamental relationships in the decision- making process: Event Accountant’s analysis & recording Financial Statements Users
  • 5. Business Activities Operating Activities Investing Activities Financing Activities
  • 6. The Balance Sheet Sections of the balance sheet: • Assets - resources of the firm that are expected to increase or cause future cash flows (everything the firm owns) • Liabilities - obligations of the firm to outsiders or claims against its assets by outsiders (debts of the firm) • Owners’ Equity - the residual interest in, or remaining claims against, the firm’s assets after deducting liabilities (rights of the owners)
  • 7. The Balance Sheet The balance sheet equation: Assets = Liabilities + Owners’ Equity or Owners’ Equity = Assets - Liabilities
  • 8. Balance Sheet Transactions • The balance sheet is affected by every transaction that an entity encounters. • Each transaction has counterbalancing entries that keep total assets equal to total liabilities and owners’ equity, i.e., the balance sheet equation must always be balanced.
  • 10. Types of Accounts Personal Accounts Impersonal Accounts Real Accounts Nominal Accounts
  • 11. Classification of Accounts • Personal Account (Related to person or Individual) – Natural Persons’ Account – Artificial Persons’ Account – Representative Personal Account • Real Account (Related to Property, Possession or Liability) – Tangible Real Account – Intangible Real Account
  • 12. Classification of Accounts • Nominal Account – Income – Gain – Loss – Expenses
  • 13. Personal Accounts • Credit Transaction in a business are carried out with a living person, an institution or an artificial person. As a result of such transaction debtor – creditor (receiver or giver) relationship arises. – For e.g.(1) Urmila’s Accounts, (2) Rameshbhai’s Accounts, (3) Dena Bank’s Accounts (4)L.I.C.’s Accounts (5) Gujarat Electricity Board’s Accounts (6) Kadi Nagarpalika’s Accounts.
  • 14. Real Accounts • The product traded in a business is known as goods. Separate accounts are maintained for incoming (Purchase) and outgoing (Sales) of goods.
  • 15. Real Accounts 1) Goods A/c: Transaction related to the exchange of goods. For e.g. (a) Purchase A/c, (b) Sales A/c, (c) Purchase Returns A/c (d) Sales Returns A/c (e) Stolen Goods A/c (f) Goods withdrawn for personal use A/c (g) Goods destroyed by fire A/c (h) Goods given as free samples A/c (i) Goods given as charity A/c, etc.
  • 16. Real Accounts 2) Assets Account: An item or a right owned by the business and having financial value is known as an asset. Such assets are useful for the proper running of the business.
  • 17. Real Accounts (a) Fixed or long term Assets like land & building, machinery, furniture, vehicles, goodwill, patents, copyright, etc (b) Investments such as shares & debentures of Reliance Ind, Kisan Vikas Patra, Post office Savings, etc. (c) Current Assets A/c like Cash A/c, Stock A/c, Debtors A/c, etc.
  • 18. Nominal Accounts Certain expenses have to be incurred for carrying on the business. There are various incomes also in the business. Such income & expenses a/c are known as Nominal Accounts
  • 19. Nominal Accounts Accounts of expense include: Wages A/c, Cartage A/c, Postage & Telegram A/c, Salary A/c, Depreciation A/c, Electricity A/c, Discount allowed A/c, Bank Charges A/c, Advertisements Expense A/c, etc. Accounts of Income include: Interest received A/c, Discount received A/c, Dividend received A/c, Rent received A/c, Commission received A/c, Brokerage received A/c, etc.
  • 20. Examples • Vishal’s A/c • Rent Paid A/c • Rent received A/c • Interest Received A/c • Building Account A/c • Machinery A/c • Purchase A/c (goods A/c) • Discount Allowed A/c • Sales A/c • Discount Received A/c
  • 21. Examples • Cartage Paid • Harish A/c • Naresh A/c • Furniture A/c • Cash A/c • Bank A/c • Bank Overdraft • Commission received • Commission Paid • Bills Payable • Bills Receivable
  • 22. Rules of Debit Credit Nominal AccountsReal AccountsPersonal Accounts (1)Debit expenses & losses (2)Credit incomes & gains (1)Debit what comes in (2)Credit what goes out (1)Debit the receiver (2)Credit the giver
  • 23. Rules of Debit and Credit Debit Credit • Personal Account The Receiver The Giver • Real Account What Comes in What goes out • Nominal Account All losses and All gains and exp. Income
  • 24. Type ofType of AccountsAccounts When to DebitWhen to Debit When to CreditWhen to Credit PersonalPersonal AccountAccount If the person receivesIf the person receives something from thesomething from the business, his account inbusiness, his account in the books of thethe books of the business is to be Debitedbusiness is to be Debited If the person giveIf the person give something to the business,something to the business, his account in the books ofhis account in the books of the business is to bethe business is to be credited.credited. Real AccountReal Account Account of goods orAccount of goods or assets coming into theassets coming into the business is to be debitedbusiness is to be debited Accounts of goods or assetAccounts of goods or asset going out of the businessgoing out of the business is to be Creditedis to be Credited NominalNominal AccountAccount Account of expense orAccount of expense or loss to be debitedloss to be debited Accounts of income or gainAccounts of income or gain to be Creditedto be Credited
  • 25. The Double-Entry Accounting System • Businesses enter into thousands of transactions daily. – Accountants must carefully keep track of and record these transactions in a systematic manner. • Accountants use a double-entry accounting system, in which at least two accounts are always affected by each transaction.
  • 26. The Double-Entry Accounting System • Each transaction must still be analyzed to determine which accounts are involved, whether the accounts increase or decrease, and how much the balance will change. • The balance sheet equation can be used for this analysis, but with so many transactions, this is not realistic. – In practice, accountants use ledgers.
  • 28. Journal • Chronological record of the transactions • Consists of at least one debit and one credit
  • 29. Journalizing Transactions • Identify each account affected and its type • Determine whether each account is increased or decreased. Use the rules of debit and credit • Record transaction in journal, including a brief explanation – Debit side of entry is entered first – Total debits should always equal total credits
  • 30. General Journal Journal Page 1Journal Page 1 DateDate DescriptionDescription L.F.L.F. DebitDebit CreditCredit Jul 1Jul 1 CashCash 45,00045,000 Vishal’s CapitalVishal’s Capital 45,00045,000 Investment from ownerInvestment from owner Accounts AffectedAccounts Affected Amount of debits and credits Amount of debits and credits Explanation of transaction Explanation of transaction Transaction Date Transaction Date
  • 31. General Journal Style conventions that must be followed: • Year is entered at the top of each page • The month is only entered for the first entry on a page unless the month changes in the middle of the page. The month may be abbreviated • Enter numerical date for each transaction, even if there are many entries on same date
  • 32. General Journal • Debits are ALWAYS entered first in an entry. Use the EXACT account title and do not abbreviate • Credits are INDENTED and listed second • Do not use currency signs • SKIP A LINE between each entry • Never split an entry between two pages
  • 33. Example Mr. Vishal brought cash Rs. 25000 in the business
  • 34. Example Analysis of June 1 transaction: • Cash is increasing • Cash is real account • Real Account : Debit what comes in GENERAL JOURNALGENERAL JOURNAL DATEDATE DESCRIPTIONDESCRIPTION L.F.L.F. DEBITDEBIT CREDITCREDIT Jun 1 Cash 25,000
  • 35. Example Analysis of June 1 transaction: • Mr. Vishal, is the giver of capital • Mr. Vishal is a human being • Personal A/c: Credit the giver GENERAL JOURNALGENERAL JOURNAL DATEDATE DESCRIPTIONDESCRIPTION L.F.L.F. DEBITDEBIT CREDITCREDIT Jun 1 Cash 25,000 Mr. Vishal’s Capital 25,000 Owner invested in business
  • 36. Example • Purchased Medical supplies from Torrent Pharma Rs. 10000
  • 37. Example Analysis of June 2 transaction: • Medical Supplies is coming into business • Medical Supplies is current asset • Real Account : Debit what comes in GENERAL JOURNALGENERAL JOURNAL DATEDATE DESCRIPTIONDESCRIPTION L.F.L.F. DEBITDEBIT CREDITCREDIT Jun 2 Medical Supplies 10,000
  • 38. Example Analysis of June 2 transaction: • Torrent Pharma is supplier of goods • Torrent Pharma is an artificial person • Personal Account: credit the giver GENERAL JOURNALGENERAL JOURNAL DATEDATE DESCRIPTIONDESCRIPTION L.F.L.F. DEBITDEBIT CREDITCREDIT Jun 2 Medical Supplies 10,000 Torrent Pharma 10,000 Purchased medical supplies
  • 39. Example • Rent Paid in Cash Rs. 4000
  • 40. Example Analysis of June 2 transaction: • Rent is an Expense • Rent is a part of Nominal Account • Debit the expense GENERAL JOURNALGENERAL JOURNAL DATEDATE DESCRIPTIONDESCRIPTION L.F.L.F. DEBITDEBIT CREDITCREDIT Jun 2 Rent Expense 4,000
  • 41. Example Analysis of June 2 transaction: • Cash is going out of the business • Cash is a part of real account • Credit what goes out GENERAL JOURNALGENERAL JOURNAL DATEDATE DESCRIPTIONDESCRIPTION L.F.L.F. DEBITDEBIT CREDITCREDIT Jun 2 Rent Expense 4,000 Cash 4,000 Rent paid in cash
  • 42. Example • Service Rendered to Ramesh of Rs. 12000
  • 43. Example Analysis of June 3 transaction: • Ramesh is receiving the services, Ramesh is a human being • Personal Account • Debit the receiver GENERAL JOURNALGENERAL JOURNAL DATEDATE DESCRIPTIONDESCRIPTION L.F.L.F. DEBITDEBIT CREDITCREDIT Jun 3 Ramesh 12,000
  • 44. Example Analysis of June 3 transaction: • Service Revenue is coming in the business • Service Revenue is part of nominal account • Credit income & gains GENERAL JOURNALGENERAL JOURNAL DATEDATE DESCRIPTIONDESCRIPTION L.F.L.F. DEBITDEBIT CREDITCREDIT Jun 3 Ramesh 12,000 Service Revenue 12,000 Performed services