Accounting is a method of keeping track of a business’s financial transactions. Accounting information is a summary of a company’s operations and financial status over just a period of time.
The foundation of accountants is the ‘Principle of Duality.’ Every corporate transaction documented in accounting records, according to this notion, has a two-fold effect. To put it another way, every transaction recorded in books of accounts must comprise at least two accounts.
For example, Shaw Pvt. Ltd. acquires 5,000 units of primary commodities worth ₹5 lakh for its business. In this transaction, Shaw Pvt. Ltd. obtains goods in return for ₹5,00,000 in cash. To put it differently, raw materials are entering the firm, but money in the amount of ₹5 lakh is exiting.
As a result of activities, the raw – materials stock improved by 5,000 units. Simultaneously, it has an influence on the company’s cash, decreasing it by ₹5 lakh. This is called the ‘Double Entry System,’ and it is often employed in the production of a business’s account books.
Did you know?
Mathematician Luca Pacioli was the first to publish a system of double-entry bookkeeping that matched each debit (Latin for “he owes”) with a credit (“he trusts”).
The ‘Dual Accounting Concept’ states that every business deal has an equal but opposite effect on at least 2 distinct accounts, as can be shown. Points to keep in mind-
- Irrespective of the size of an organisation, accounting plays a critical part in decision making, cost estimation, and financial performance monitoring.
- A bookkeeper is capable of handling all accounting needs, and a Certified Public Accountant (CPA) can handle bigger or more complicated accounting chores.
- Managerial and cost-accounting are two important types of accounting for businesses. Cost accounting supports business owners in calculating the pricing of a product, whereas managerial accounting assists management teams in making business decisions.
- Professional accountants follow a set of principles known as the GAAP for preparing financial statements (Generally accepted principles)
Also Read: Real Accounts – Overview, Types & Examples
Types of Accounts in Accounting
The different types of accounts in accounting are as follows-
Personal Account
A personal account is a general ledger account that is linked to all persons or people, such as individuals, businesses, or organisations. A personal account is an example of a creditor account.
Personal accounts, for example, are those affiliated with an individual, a corporation, a firm, or a group of associations. These individuals could be real people, synthetic people, or representatives, depending on the situation.
E.g., Manoj and Saroj Trading Co.ABC BANK, Charitable trust, X Company Ltd., etc.
Some accounts may be classified as personal representative accounts.
For example, when we talk about salary, we refer to the amount of money paid to each employee. However, all salary accounts are combined into one account called salary payable A/c.’
Types of Personal Accounts
Natural Persons
Individuals or natural persons are associated with these accounts, such as Ranveer’s A/c, Aryan’s A/c, Ritwik’s A/c, etc.
Artificial Accounts
These accounts are linked to a variety of businesses and organisations, including Roy Brothers Pvt Ltd A/c, Lion’s Club A/c, and others. As a result, such institutions and businesses are those that exist in the eyes of the law.
Accounts of Representatives
Representative accounts are accounts that represent a specific type of employment. Outstanding Wages Accounts, Outstanding Interest Accounts, Prepaid Expense Accounts, etc.
Real Accounts
Real accounts are those that handle assets, property, or possessions. These characteristics could be biological or nonphysical. As a result, two separate types of open accounts must be created:
Types of Real Accounts
There are two types of real accounts: Intangible and Physical.
Tangible Real Accounts
Accounts that are physical in nature are referred to as actual palpable accounts. To put it another way, these advantages are visible to the naked eye. These assets can be felt, seen, and touched. Building air conditioning, vehicle air conditioning, machinery air conditioning, and so on.
Real Intangible Accounts
Accounts that deal with non-physical assets or things are referred to as this type of account. In other words, these assets cannot be seen, felt, or touched, yet they can be valued in monetary terms. These assets can be said to have some value associated with them.
Examples include goodwill, patents, trademarks, and copyrights.
This type of personal account has a golden rule:
- What is received must be debited.
- What goes out should be credited.
Nominal Account
Nominal accounts are all those linked to any form of revenue or expenditure, profit or loss. Air conditioning for rent, pay for air conditioning, wage climate control, and so forth.
For such accounts, the golden rule is:
- All losses and expenses related to the business must be subtracted.
- All kinds of business income and gains, if any, should be credited.
When a salary is paid to company personnel, for example, the payroll A/c is deducted, as are any additional expenses incurred. Any reductions, interest, or any other benefits earned by the business entity, on the other hand, are recognised as soon as it is received.
The Accounting Process
Accounting is one of the most critical aspects of practically any company. It could be handled by a bookkeeper or accountant in a small business or by big financial departments with dozens of staff in more giant corporations. Various accounting reports, such as cost accounting and managerial accounting, are vital in assisting management in making educated company decisions.
Financial statements are brief and consolidated reports based on thousands of individual financial transactions that explain a vast company’s operations and financial status during a specific period. As a result, all accounting certifications result from years of study and challenging examinations and a minimum of practical accounting experience.
While a bookkeeper can do basic accounting activities, qualified accountants with qualifications such as Certified Public Accountant (CPA) or Certified Management Accountant (CMA) are normally responsible for advanced accounting.
Also Read: 3 Golden Rules of Accounting Explained with Best Examples
Accounting’s Background
Accounting has been around almost as long as money. Among other ancient civilisations, accounting can be traced back to Babylonia, Egypt. During Rome, for example, the government maintained precise financial records. Assumed a new, on the other hand, has been in existence since the early 1800s.
Luca Pacioli is recognised as “The Father of Accounting and Bookkeeping” for his contributions to the creation of accounting as a profession. In 1494, Pacioli, an Italian mathematician and friend of Leonardo da Vinci, published a dissertation on the double-entry books of accounts.
By 1880, England and Wales’ Institute of Chartered Accountants had completely developed and acknowledged the modern accountancy profession. Many of the accounting systems in use today were invented at this organisation. The Industrial Revolution was instrumental in the foundation of the institute. Merchants have to keep a record of their records in order to avoid going bankrupt.
Now you’re going to wonder what an accountant’s responsibilities are and what talents an accountant possesses.
Accountants help businesses keep correct and up-to-date financial records. Accountants are responsible for recording a company’s everyday monetary business and converting it into financial statements such as income statements, balance sheets and cash flow statements. Accountants also perform periodic audits and generate ad-hoc reports, among other things.
Accountants come from many different backgrounds. However, accountants should be capable of recognising and repairing tiny flaws or anomalies in a company’s finances. Therefore, attention to detail is a fundamental component of accountancy. To aid in problem-solving, the capacity to think logically is also necessary. Due to the widespread availability of computers and calculators, mathematical abilities do help but are less crucial than in earlier generations.
Conclusion
An account is a detailed explanation of a company’s dealings with respect to a certain person, entity, symbol or item.
Customers and suppliers are both regarded as separate bank accounts when a business conducts business with them. Businesses can also buy tangible assets such as land, machinery, factories, and buildings. Even though they are all linked to things, each of these real assets is treated as a separate account.
As a result, whenever a business conducts transactions, it must designate and identify the accounts involved. The next step is to apply the relevant accounting standards and golden accounting rules in order to keep track of such transactions. A T-Format is also commonly used to record an account. There are two sides to a T-Account. The debit side refers to the account’s left side, whereas the credit side refers to the account’s right side.
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