THREE ACCOUNTING GOLDEN PRINCIPLES

THREE  GOLDEN ACCOUNTING PRINCIPLES

We have seen that an account may be related to a person or thing(Tangible or Intangible). While doing business transactions, one may come across numerous accounts that are affected. One has to decide about the accounting treatment for each of the account. The accounts are classified depending on their characteristics.

Let us see what each type of accounts means

       Personal Accounts : 

     As the name suggests these are accounts related to persons

  

          Natural Persons: The persons are natural persons (Human Beings) like Rajini A/c, Shiva A/c, Rani A/c etc.

     Artificial persons: The persons could also be artificial persons like Corporates, companies or association of persons, partnership etc. Accordingly, we could have Dr.reddy A/c, Tata A/c, SBI bank A/c, Gupta & Trading A/c etc.

  

      Representative Persons: There could be representative personal accounts as well. Although the individual identify of persons related to these is known, the convention is to reflect them as collective accounts. EX When expenses are payable like Rent payable, Salary Payable, Expense paid in advance, Income received in advance etc.

PERSONAL ACCOUNT RULE

Real Accounts:

These are accounts related to assets (i.e. Properties, Possessions).Depending on their physical existence ,they are classified as follows

Tangible Real accounts: Assets that have physical existence and can be seen, and touched. Ex-Building, land, Machinery, Stock, cash & Vehicle etc.

Intangible Real Accounts: These Assets that don’t have any physical existence but can measured in terms of money and have value attached to them .Ex-Trade mark A/c, Goodwill A/c, Patents & Copy rights, Intellectual Property Rights a/c etc.

REAL ACCOUNT RULE

1    Nominal Account: These accounts are related to expense or losses and income or gains Ex- Purchase A/salary A/c, Rent A/c,Sales A/c, commission received A/c. etc.

NOMINAL ACCOUNT RULE

The rules further simplified for better understanding

Any Assets Account

DEBIT- Record Receipt of asset or Increase of asset

CREDIT- Record payment or sale of asset  or decrease of asset

Any Capital Account

DEBIT- Record payment or decrease of Capital

CREDIT- Record Receipt or Increase of Capital

Any Liability Account

DEBIT- Record payment or decrease of Liability

CREDIT- Record Receipt or Increase of Liability

Any Revenue Account

DEBIT- Record payment or decrease of Revenue

CREDIT- Record Receipt or Increase of Revenue

Any expense Account

DEBIT- Record payment or Increase of Expense

CREDIT- Record Receipt or Decrease of Expense

Note:

Asset: 

Asset is a resource owned by the business with the purpose of using it for generating future profits.

Assets are further classified as current & Non-Current assets.

Current Assets- An asset shall be classified as current when it satisfies the following conditions:

1. It is expected to be realized in, or is intended for sale or consumption in the entity normal operating cycle.
2. It is primarily held for trading purpose.
3. It is due to be realized within 12 months after reporting date.
4. It is cash or cash equivalent.

Non-Current assets – All other assets shall be classified as non-current asset

 Ex- Machinery, Building etc.

Liability:

It is an obligation of financial nature to be settled at a future date. It represents amount of money that the business owes to the other parties.

Liabilities are further classified as Current & Non-Current Liability

Current Liabilities –A liability shall be classified as Current when it satisfies the following conditions:

1. It is expected to be settled in normal operating cycle.
2. It is primarily held for trading purpose.
3. It is due to be settled within 12 months after reporting date.

Non-Current Liabilities –All other Liabilities shall be classified as non-current Liabilities

 Ex-Loans taken for 3 Years , Debenture issued etc.