types of accounts

Accounting

DR Khyati Boriya

Accounting as an Aid toDecision 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 toDecision Making

• Fundamental relationships in the decision-making process:

EventAccountant’sanalysis &recording

FinancialStatements 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’ Equityor

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 AccountsAccounts 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 Accounts

Real 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 ofAccountsAccounts When to DebitWhen to Debit When to CreditWhen to Credit

PersonalPersonalAccountAccount

If the person receivesIf the person receivessomething from thesomething from thebusiness, his account inbusiness, his account inthe books of thethe books of thebusiness is to be Debitedbusiness is to be Debited

If the person giveIf the person givesomething to the business,something to the business,his account in the books ofhis account in the books ofthe business is to bethe business is to becredited.credited.

Real AccountReal Account

Account of goods orAccount of goods orassets coming into theassets coming into thebusiness is to be debitedbusiness is to be debited

Accounts of goods or assetAccounts of goods or assetgoing out of the businessgoing out of the businessis to be Creditedis to be Credited

NominalNominalAccountAccount

Account of expense orAccount of expense orloss to be debitedloss to be debited

Accounts of income or gainAccounts of income or gainto be Creditedto be Credited

The Double-EntryAccounting 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-EntryAccounting 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 1DateDate DescriptionDescription L.F.L.F. DebitDebit CreditCreditJul 1Jul 1 CashCash 45,00045,000

Vishal’s CapitalVishal’s Capital 45,00045,000

Investment from ownerInvestment from owner

Accounts Affected

Amount of debits and credits

Explanation of transaction

Transaction Date

General JournalStyle 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 inthe business

Example

Analysis of June 1 transaction:• Cash is increasing• Cash is real account• Real Account : Debit what comes in

GENERAL JOURNALGENERAL JOURNALDATEDATE 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 JOURNALDATEDATE 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

ExampleAnalysis of June 2 transaction:• Medical Supplies is coming into business• Medical Supplies is current asset• Real Account : Debit what comes in

GENERAL JOURNALGENERAL JOURNALDATEDATE 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 JOURNALDATEDATE DESCRIPTIONDESCRIPTION L.F.L.F. DEBITDEBIT CREDITCREDIT

Jun 2 Medical Supplies 10,000Torrent Pharma 10,000

Purchased medical supplies

Example

• Rent Paid in Cash Rs. 4000

ExampleAnalysis of June 2 transaction:• Rent is an Expense• Rent is a part of Nominal Account• Debit the expense

GENERAL JOURNALGENERAL JOURNALDATEDATE DESCRIPTIONDESCRIPTION L.F.L.F. DEBITDEBIT CREDITCREDIT

Jun 2 Rent Expense 4,000

ExampleAnalysis of June 2 transaction:• Cash is going out of the business• Cash is a part of real account• Credit what goes out

GENERAL JOURNALGENERAL JOURNALDATEDATE 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

ExampleAnalysis of June 3 transaction:• Ramesh is receiving the services, Ramesh is a

human being• Personal Account• Debit the receiver

GENERAL JOURNALGENERAL JOURNALDATEDATE DESCRIPTIONDESCRIPTION L.F.L.F. DEBITDEBIT CREDITCREDIT

Jun 3 Ramesh 12,000

ExampleAnalysis of June 3 transaction:• Service Revenue is coming in the business• Service Revenue is part of nominal account• Credit income & gains

GENERAL JOURNALGENERAL JOURNALDATEDATE DESCRIPTIONDESCRIPTION L.F.L.F. DEBITDEBIT CREDITCREDIT

Jun 3 Ramesh 12,000Service Revenue 12,000

Performed services