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.
accounting principles



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.

account rule
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.


account rule
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.

accounting rule
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.

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