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An Element in accounting
An element for the purpose of accounting is that aspect relating to which we wish to find/know information. Each element in accounting is identified as an account or an accounting head.
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Types/Kinds of Accounts
All the accounting heads used in an organisational accounting system are divided into three kinds/types.
Personal Accounts
The elements or accounts which represent persons and organisations.
Real Accounts
The elements or accounts which represent assets In the initial stages of learning accounting, we can assume real accounts to be those related to tangible aspects.
Tangible/Touc hable
Capable of being perceived by the senses or the mind; especially capable of being handled or touched or felt. There are assets which are intangible like the organisations Goodwill. [At this stage of the learning process, please ignore the presence of such assets.]
Nominal Accounts
The elements or accounts which represent expenses, losses, incomes, gains.
Therefore we may also interpret Nominal accounts as, the accounts other than Personal and Real accounts Real accounts as, the accounts other than Personal and Nominal accounts Personal accounts as, the accounts other than Real and Nominal accounts
Capital
1,00,000
+
+
Liabilities
Mr. Shyam Rao (5,000)
=
=
A ssets
Cash (13,000) + Furniture (25,000) + Stock (5,000) Bank (60,000) + M/s Bharat & Co (2,000)
Notice that the assets side is made up of Real a/c's and the Liabilities side is made up of Personal a/c's. Capital a/c represents the owner of the business and therefore is a Personal account. All other liabilities imply the amounts we owe to others (persons or organisations) and thus are personal accounts.
The mor e the infor mation we need, The mor e the accounting heads we have to maintain. (Or ) The mor e the infor mation we need, The mor e the number of elements into which we need to divide the or ganisational accounting.
Liabilities a/c
All liabilities shall be considered under a single head Liabilities a/c (which includes capital).
Expenses/Losses a/c
All the expenses/losses whatever they may be are considered under a single head Expenses/Losses a/c.
Thus to have a clear and better understanding/information regarding liabilities, the Liabilities a/c is replaced by two accounts: Capital a/c and Liabilities a/c. [The more the information we need the more the accounting heads we have to maintain] Therefore, the minimum accounting heads to be maintained would be 5 i.e. Capital a/c, Liabilities a/c, Assets a/c, Expenses/Losses a/c, Incomes/Gains a/c.
Illustration :
Considering the same example (as in the previous page) of business transactions relating to the business of Mr. Oberoi . 1.
2.
3.
4.
Bought Goods for c ash Rs. 25,000 from M/s Roxy Brothers.
Since goods are bought by paying cash, the value of Goods increases by Rs. 25,000 and the cash available with the business would reduce by Rs. 25,000.
Bought Goods from Mr. Shy am Rao on c redit for Rs. 10,000.
Since goods are bought on credit, the value of Goods increases by Rs. 10,000. The liabilities of the business would increase by Rs. 10,000. This liability is identified by the name of the vendor who gave the goods on credit i.e. Mr. Shyam Rao.
6.
Sold Goods on c redit to M/s Bharat & Co., for Rs. 10,000.
Since goods are sold on credit, the value of Goods decreases by 10,000. A new asset in the form of a debtor (those who owe us) is created. The new asset is identified by the name of the organisation which purchased the goods on credit i.e. M/s Bharat & Co.
8.
9.
10.
Rec eived c ash from M/s Bharat & Co., on ac c ount, Rs. 8,000.
Since cash is received from M/s Bharat & Co., the available cash increases by Rs. 8,000 and the asset in the name of M/s. Bharat & Co (the amount receivable from them) also reduces by Rs. 8,000.
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