The process of identifying, measuring and communicating economic information to permit informed judgments and decision by users of the information.
Financial statements will be useful to the following parties:
- Suppliers
- Customers
- Employees
- Banks
- Suppliers of equipments, buildings and other assets
- Lenders
- Owners
Types of Accounts
There are basically three types of Accounts maintained for transactions :
- Real Accounts
- Personal Accounts
- Nominal Accounts
Real Accounts
Real Accounts are Accounts relating to properties and assets, which are owned by the business Concern and the balances in these accounts at the end of an accounting period will be carried over to the next period. Real accounts include tangible and intangible accounts. For example; Land& Building, Goodwill, Purchases, Cash
Rules of Accounting:Debit what comes in & Credit what goes out
Personal Accounts
Personal Accounts are Accounts which relate to persons. Personal Accounts include the following.For Ex; Suppliers,Customers, Lenders
- Accounts of natural or physical persons. Ex: Rama Account, Krishna Account
- Accounts of artificial or legal persons. Ex: ABC & Co.
- Representative personal account. Ex: O/S Expenses Account, O/S income Account, Prepaid Expenses Account, Income Received in Advance.
Rules of Accounting:Debit the Receiver & Credit the Giver
Nominal accounts
Nominal Accounts are Accounts which relate to incomes and expenses and gains and losses of a business concern. For example: Salary Account, Dividend Account, Rent Account, Interest Account.
Rules of Accounting:Debit all expenses and losses & Credit all income and gains
Accounts can be broadly classified under the following four groups.
- Assets
- Liabilities
- Income
- Expenses
The above classification is the basis for generating various financial statements viz., Balance Sheet, Profit & Loss A/c and other MIS reports. The Assets and liabilities are taken to Balance sheet and the Income and Expenses accounts are posted to Profit and Loss Account.
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