Types of accounts

types of accounts with appropriate easy examples for beginners in accounts

1. Accounting
DR Khyati Boriya

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.

9. TYPES OF ACCOUNTS

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 AccountThe ReceiverThe Giver
•Real Account What Comes in What goes out
•Nominal AccountAll 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.

27. RECORD
TRANSACTIONS IN
THE JOURNAL

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
Jun1Cash 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
Jun1Cash 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
Jun2Medical 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
Jun2Medical 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
Jun2Rent 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
Jun2Rent 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
Jun3Ramesh 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
Jun3Ramesh 12,000
Service Revenue 12,000
Performed services