types of accounts
TRANSCRIPT
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Accounting
DR Khyati Boriya
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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.
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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.
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Accounting as an Aid toDecision Making
• Fundamental relationships in the decision-making process:
EventAccountant’sanalysis &recording
FinancialStatements Users
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Business Activities
Operating Activities
Investing Activities
Financing Activities
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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)
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The Balance Sheet
The balance sheet equation:
Assets = Liabilities + Owners’ Equityor
Owners’ Equity = Assets - Liabilities
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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.
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TYPES OF ACCOUNTS
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Types of Accounts
Personal Accounts
Impersonal Accounts
Real Accounts
Nominal Accounts
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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
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Classification of Accounts
• Nominal Account – Income– Gain– Loss – Expenses
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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.
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Real Accounts
• The product traded in a business is known as goods. Separate accounts are maintained for incoming (Purchase) and outgoing (Sales) of goods.
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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.
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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.
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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.
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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
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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.
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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
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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
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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
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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
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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
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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.
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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.
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RECORD TRANSACTIONS IN
THE JOURNAL
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Journal
• Chronological record of the transactions• Consists of at least one debit and one credit
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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
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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
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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
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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
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Example
Mr. Vishal brought cash Rs. 25000 inthe business
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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
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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
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Example
• Purchased Medical supplies from Torrent Pharma Rs. 10000
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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
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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
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Example
• Rent Paid in Cash Rs. 4000
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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
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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
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Example
• Service Rendered to Ramesh of Rs. 12000
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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
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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