ACCOUNTING

CLASSIFICATION OF ACCOUNTS
Transactions

• Any event that impacts the financial position of a business

• Can be measured reliably
• Two sides:
• Business gives something
• Business receives something
• Accounting records both sides of a transaction

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The Account

• Record of all changes in a particular asset, liability or equity

• Remember the accounting equation
• Assets = Liabilities + Owner’s Equity

2-3
CLASSIFICATION OF ACCOUNTS

Every business deal with other “Person”, possesses

“Assets”, pay “Expenses” and receive “Income”.
So from the above, we can see every business has to
keep
• An account for each person
• An account for each asset and
• An account for each expense or income.
CLASSIFICATION OF ACCOUNTS

ACCOUNTS

PERSONAL IMPERSONAL
ACCOUNTS ACCOUNTS

REAL ACCOUNTS NOMINAL

ACCOUNTS ACCOUNTS
PERSONAL ACCOUNTS

Accounts in the name of persons are known as

personal accounts.
Eg: Babu A/C,
Babu & Co. A/C,
Outstanding Salaries A/C, etc.
REAL ACCOUNTS

These are accounts of assets or properties. Assets

may be tangible or intangible. Real accounts are
impersonal which are tangible or intangible in
nature.
Eg:- Cash a/c, Building a/c, etc are Real
Accounts related to things which we can feel,
see and touch.
Goodwill a/c, Patent a/c, etc Real Accounts
which are of intangible in nature.
NOMINAL ACCOUNTS

These accounts are impersonal, but invisible and

intangible. Nominal accounts are related to those
things which we can feel, but can not see and
touch. All “expenses and losses” and all “incomes
and gains” fall in this category.
Eg:- Salaries A/C, Rent A/C, Wages A/C, Interest
Received A/C, Commission Received A/C,
Discount A/C, etc.
Common Asset Accounts

• Cash
• Bank accounts, cash on hand
• Accounts Receivable
• Customer promise to pay for goods or services provided
• Represents future collection of cash
• Notes receivable
• Written promise to pay
• Bear interest

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Common Asset Accounts

• Inventory
• Products held for sale
• Prepaid expenses
• Expenses paid for in advance
• Provide future benefit
• Includes prepaid rent, prepaid insurance and supplies
• Land

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Common Asset Accounts

• Buildings
• Equipment
• Furniture and Fixtures

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Common Liability Accounts

• Accounts payable
• Company’s promise to pay for goods or services received
• Notes payable
• Signed agreements to pay
• Include interest
• Accrued liabilities
• Expenses that have not been paid
• Include interest payable and salaries payable

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Equity Accounts

• Common stock
• Shareholders’ investment in the company
• Retained earnings
• Earnings kept by the company
• Cumulative net income minus dividends paid to
shareholders
• Revenues
• Earned by providing goods or services
• Expenses
• Costs of operating a business

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Transaction Analysis

• Every transaction has at least two parts

• The accounting equation always balances before and after each
transaction
• A common transaction for a new business is to issue stock to its
owners
• How would this impact the accounting equation?

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Example Transaction (1)

• Three friends decide to start a salon

• They invest $50,000 to begin the business
• The business issues common stock to the owners

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 Stockholders’ Type of Equity
Assets = Liabilities + Equity Transaction
Cash Common stock

(1) +$50,000 (1) +$50,000 Issued stock

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Example Transaction (2)

• The salon purchases chairs and massage tables for $12,000

2-17
 Stockholders’
Assets = Liabilities + Equity

Cash Supplies Equip. Accts Pay Common Retained

stock Earnings

(1) + $50,000 (1) +$50,000

(2) - $12,000 (2) + $12,000

$38,000 + $12,000 = $50,000

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Example Transactions (3)

• The salon purchases hair styling and other supplies on account for
$5,000

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 Stockholders’
Assets = Liabilities + Equity

Cash Supplies Equip. Accts Pay Common Retained

stock Earnings

(1) + $50,000 (1) +$50,000

(2) - $12,000 (2) + $12,000

(3) +$5,000 (3) +$5,000

$38,000 $5,000 $12,000 $5,000 $50,000

$55,000 $55,000

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Example Transaction (4)

The salon earns $6,000 from providing services to customers. The

business collected cash.

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 Stockholders’
Assets = Liabilities + Equity
Cash Supplies Equip. Accts Pay Common Retained
stock Earnings

(1) + $50,000 (1) +$50,000

(2) - $12,000 (2) + $12,000

(3) +$5,000 (3) +$5,000

(4) +$6,000 (4) +$6,000

Revenue

$44,000 $5,000 $12,000 $5,000 $50,000 $6,000

$61,000 $61,000

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Example Transaction (5)

• The salon paid monthly rent of $4,000

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 Stockholders’
= Liabilities + Equity
Assets
Cash Supplies Equip. Accts Pay Common Retained
stock Earnings

(1) + $50,000 (1) +$50,000

(2) - $12,000 (2) + $12,000

(3) +$5,000 (3) +$5,000

(4) +$6,000 (4) +$6,000

Revenue

(5) - $4,000 (5) - $4,000

Expense

$40,000 $5,000 $12,000 $5,000 $50,000 $2,000

$57,000 $57,000
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Learning Objective

Understand how accounting works

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 Double-entry Accounting
• Each transaction affects at least
two accounts

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The T-account

Account Title
Debits on the Credits on the
left side right side

Every transaction
has both a debit
and a credit

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Debit and Credit Rules

• Debit and credit are neutral terms

• Not good or bad
• Mean either a decrease or increase depending on the type of
account

2-28
 Debits and Credits

STOCKHOLDERS’
ASSETS = LIABILITIES + EQUITY

Debit Credit Debit Credit Debit Credit

+ - - + - +

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RULES FOR DEBIT AND CREDIT

Debit the Receiver

Personal
Account Credit the Giver

Debit what comes in

Real Accounts Credit what goes
out
Debit all Expenses
Nominal and Losses
Accounts Credit all Incomes
and Gains
Debits and Credits

Debit to increase Credits to increase

• Assets • Liabilities
• Dividends • Revenue
• Expenses • Common stock
• Retained earnings

Do NOT proceed until you learn

these rules!

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Exercise

• Purchased a Building for Rs.20,000/-.

• Paid Cash Rs.1,000/- to Shah.

• Paid Salary Rs.1000/-.

• Received Commission Rs.250/-.

• Sold goods for Cash Rs.3500/-.

Practicing Debits and Credits

• Increase cash
• Debit
• Increase accounts payable
• Credit
• Decrease accounts receivable
• Credit
• Increase revenue
• Credit

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Practicing Debits and Credits

• Increase rent expense

• Debit
• Increase common stock
• Credit
• Decrease notes payable
• Debit
• Decrease cash
• __________________________
What type of
account is
cash? How is it
increased?

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 The Accounting Cycle
• For a new business, it begin by setting up ledger accounts.
• For an established business, begin with account balances carried over from
the previous period.
 Detailed Steps in the Accounting Cycle

Analyze Journalize Prepare

Business Post entries
transactions to the unadjusted
Transactions in the journal. trial
. accounts in
the ledger. balance.

Post-closing
trial balance

Prepare Journalize
Prepare
Journalize and financial and post
adjusted trial
post closing statements. adjusting
entries entries
balance.
The Steps In The Accounting Cycle

1. Analyze source documents & record business

transactions in a journal
2. Post journal entries to the ledger accounts
3. Prepare unadjusted trial balance (TB)
4. Journalize and post end of period adjustments (EOPA)
5. Prepare adjusted Trial Balance
6. Prepare /Create financial statements & reports from
data in adjusted TB
7. Journalize and post the closing entries
8. Prepare the post-closing trial balance
9. Prepare and post reversing entries
Subsidiary Books

• General Journal
• Special Journals
• Purchase Book
• Sales Book
• Purchase Return Book
• Sales Return Book
• Bills Receivable Book
• Bills Payable Book
• Cash Book
• Petty Cash Book
Journal
Journal is the prime or original book of entry in
which all transactions are recorded in the form of
entries. Journalising is an act of recording or
entering transactions in a Journal in the order of
date.

Date Particulars LF Debit Credit

Amount Amount
Journal Entry

Jan 1, 1981 Rashid Started a business Rs.

15,000/-
Date Particulars LF Debit Credit
Amount Amount
1981 Cash a/c 15,000
Jan 1 Dr. 15,000
To Rashid’s Capital
a/c
(Being cash invetsed to
business)