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GOLDEN RULES OF ACCOUNTING



CHAPTER 6


The first stage of the accounting cycle identifying the transactions of financial nature is a simple task. The problem usually at the second stage of the accounting cycle, when these transactions have to record. For the purpose the account are classified under three types of accounts.
Classifying the accounts
The accounts can be classified as:
·         Personal accounts
·         Real accounts
·         Nominal accounts





Personal account

Personal account are the account of persons or that the business deals with. They are primarily of three types:
·         Natural person account: represents the accounts of real persons the business deal with. The proprietor’s account, the accounts of suppliers and customers are some examples of natural person’s accounts.
·         Artificial personal’s accounts: represents the accounts of firm the business deals with. The accounts of a limited companies or banks that are not real persons are the example of artificial person’s accounts.
·         Representative personal accounts: if a business has not paid the rent of a number of shop for the past two months then all landlord are creditors of the business and the amount due to them is recorded under a common head called rent outstanding account.



Rule 1: rule for personal accounts: Debit the receiver and credit the giver.




Real accounts are the accounts of the properties, assets, and possession of a business. They can be of two types:

·         Tangible real account: are accounts of things that can be touched, measured, sold or purchased. Examples of tangible real accounts are furniture account, plant account, and cash account.
·         Intangible real account: are accounts of things that cannot be touched in the physical sense but can be measured in terms of money value. Goodwill, trademark, and patent rights are the examples of intangible real accounts.



Rule 2: Rule of real accounts: Debit what comes in and credit what goes out.



Nominal accounts

Nominal accounts are the accounts of income, expenses, gain, and losses of a business. Without nominal accounts, it is difficult for the management to find out where the money was spent. The net result of all the nominal accounts helps the management to find out the profit earned or loss incurred by the business. Some examples of nominal accounts are sales accounts, purchase account, salaries account, and electricity account.


Rule 3: Rule for nominal accounts: Debit all expenses and losses and credit all income and gains.




According to this system every transaction has at least two side effects. If an amount is DR. in one account then definitely will be credit on other account.


Advantages of double entry system:

Almost all the business concerns are practicing only the double entry system, which is proven to be scientific method of recording the transactions. If the system is followed the business firm gets the following advantages:


v  It gets accurate, comprehensive and reliable record of all its business transactions.
v  Comprehensive information relating to assets, liability, and profit and loss of the business will be made available.
v  It facilitates to know the actual profit or loss of the business firm for a given period.
v  By preparing the balance sheet the financial position of the business and other related information can be known.
v  Errors and frauds can be easily identified and can be prevented.




Documents on the basis of which transactions are recorded in the books of accounts are called vouchers.


Types of voucher

Source document voucher: documents which are proof of documents are called source documents. When transaction are recorded on the basis of source documents it is called source document voucher. Example cash memo, bill etc.
Accounting voucher: sometimes accountant analysis the transaction with helps of other written or printed document for separate debit or credit. Transactions are recorded on the basis of such documents which are called accounting documents.

Types of accounting voucher:

Cash voucher: when voucher is made for cash transactions then it is possible that accountant will make voucher for only one aspects other than cash.


Debit voucher is made when an account is to be debited.
Credit voucher is made when an account is to be credited.

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