Basics of Accounting
Accountancy should be known to almost everybody because you come across in your life many times. Everybody should know the method of maintaining financial records. Accounting includes two rules that are main i.e. 'debit' and credit.
Knowledge of accounts
Accountancy is basically a subject studied by the commerce students and later on they seek for a career in accounts. But accounts is applicable in our daily lives and almost everybody should have the basic knowledge of accounts. A businessman who maintains his daily accounts should have knowledge of accounting although he has studied different subjects. A graduate in the field of science, arts or any other allied course may enter into an accounting field in the later stage of life. Many banking sectors like ICICI, or nationalized banks accept any kind of graduates for their position. These candidates should gain at least basic knowledge of accounting.
Basics of accounting
Accounting is an interesting subject that everybody loves to learn. Before learning the basics of accounts, one should be familiar with the terms 'book keeping' and 'accountancy'.
Book keeping is a process of maintaining daily transactions that occur in a day. A bookkeeper maintains different types of books for finalization of accounts. The books include cash book, sales register, purchase register, journal register, ledger and other books as per the income tax rules. These books are used to maintain the routine transactions that take place in business.
Accounts are the statements that include the summary of all the transactions that take place during the assessment year. They include Profit & Loss statement, Balance Sheet and other charts such as depreciation etc.
There are some basic rules of debit and credit for bookkeeping. These basic concepts help you to maintain your daily accounts in a systematic and accurate way. Any beginner in the field of accounts should remember that there are three types of accounts and they are 1. Personal 2. Real 3. Nominal. The rules of debit and credit apply according to the type of account. Always remember that account is a process where two accounts are affected in a transaction which may be personal, real and nominal. In a transaction the effect is always dual.
Personal accounts are the accounts that include the account of a particular person. For eg. If X sells goods to Y then if you want to maintain books of X, Y becomes the receiver and sales that is made by X is considered for bookkeeping. In a personal account the rule of debit and credit is affected in this way.
'Credit' means the 'giver' and 'debit' means the 'receiver'. For the above mentioned example two accounts that are affected in the books of X are Y account and sales account.
Y becomes the receiver and hence his account should be 'debited' and sales should be 'credited. Why should sales be credited ? We will study this in the example mentioned below.
Real accounts include assets such as goods, furniture, equipments etc,. The rule for 'real ' account applies in this way. 'Debit' means 'anything that comes in' and 'credit' means 'anything that goes out. In the above-mentioned example, sales account is credit because 'the goods' which are assets go out of the firm.
Nominal accounts include fictitious accounts or intangible transactions that include profit or loss. It includes any gains or income to the business such as dividends, interests on banks, commission etc to the firm and losses or expenditures such as penalty payment, water charges, stationary, etc. For eg. If salary is paid to X by Y, the entry that is passed would be ' Salary account'…..Debit and Cash account is 'Credit' because cash which is the asset goes out of the business. Salary is the 'nominal account' here.
The entries that are passed by the bookkeeper are known as 'journal entries'. A journal entry gives an idea about the two accounts 'debit' and 'credit' that are affected. Example for a journal entry
'X' purchases goods from 'Y company Ltd', Then if you want to maintain accounts in the books of X, the entry that is passed would be
Purchase a/c …..Dr.
To Y company Ltd
The reason for the journal entry is as follows:
In the books of X, purchase is made on credit basis and so purchase a/c is affected and since purchase is a kind of expenditure it is a debit account. 'Y company LTd is the 'giver' on credit basis and so according to the rule of personal account it is 'credit'
Account statements for the year ending
When the year ends on the 31st December or 31st March every year, all the books that are maintained by the bookkeeper and all the transactions that are recorded are summarized and at the end of the year the total profit or loss is determined by preparing a statement known as 'Profit and Loss' A/c. When the profit and loss a/c is prepared only the daily transactions are recorded. To acknowledge the capital assets such as machinery or furniture that is purchased and to record all the liabilities that are payable and accounts that are receivable a statement known as 'balance sheet' is prepared.
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