what is accounting ? the basics, explained

 Meaning 

Accounting is the art of recording, classifying, and summarising in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the result thereof.”

As per this definition, accounting is simply an art of record keeping. The process of accounting starts by first identifying the events and transactions which are of financial character and then be recorded in the books of account

This recording is done in Journal or subsidiary books, also known as primary books. Every good record keeping system includes suitable classification of transactions and events as well as their summarisation for ready reference. After the transactions and events are recorded, they are transferred to secondary books i.e. Ledger

generation financial information?

1. recording  -- This is the basic function of accounting. All business transactions of a financial character, as evidenced by some documents such as sales bill, pass book, salary slip etc. are recorded in the books of account. Recording is done in a book called “Journal.”
2. classification -- Classification is concerned with the systematic analysis of the recorded data, with a view to group transactions or entries of one nature at one place so as to put information in compact and usable form. The book containing classified information is called “Ledger”. This book contains on different pages, individual account heads under which, all financial transactions of similar nature are collected.
3. interpreting -- This is the final function of accounting. It is concerned with explaining the meaning and significance of the relationship as established by the analysis of accounting data. The recorded financial data is analyzed and interpreted in a manner that will enable the end-users to make a meaningful judgement about the financial condition and profitability of the business operations.
4. communication-- It is concerned with the transmission of summarized, analyzed and interpreted information to the end-users to enable the to make rational decisions. This is done through preparation and distribution of accounting reports, which include besides the usual profit and loss account and the Balance sheet, additional information in the form of accounting ratios, graphs, diagrams, 

where do accountant work?

Accountants work for companies in every industry, enjoying careers at small businesses all the way up to very large companies. Most companies would not be able to operate without an accountant, as it’s an accountant’s job to report through financial statements the company’s economic health. Only through these financial statements can a company’s management make informed decisions about how to properly allocate resources to projects, by directing how to spend or invest the company’s money.

 Accountants can also work for themselves, setting up their own small business and freelancing their services out. Technology in the form of accounting software and accounting apps makes it easier today for many small businesses to do their own accounting, however there is the human part of the equation to consider too, as the interpretation of the data often calls for a professional. There are no legal requirements or tests you must pass to call yourself an accountant, but ideally you would have an accounting degree from a recognized institution, and some work experience.

 A CA, or “chartered Accountant”, is recognized in the accounting field. It is a designation that is considered challenging to obtain, with exact requirements varying from state to state. All states do require the undertaking of a four-part exam. However, upon receiving the designation, a CA is considered an expert in the field of accounting and would typically enjoy a much higher salary than that of an accountant. F or a breakdown on the differences between an accountant and a CA, check out “Is a CA the Same as an Accountant?”.

What is three types of accounting 

In accounting, an account is a specific header created for grouping similar transactions. It is maintained in a T-shaped tabular format with multiple columns containing matching transactions that are recorded together Following the traditional approach, there are three types of accounts in accounting: Real, Personal, and Nominal.

real, personal and Nominal accounts    

It is important to know what type of account are you dealing with because if you fail to identify an account correctly as either a real, personal or nominal account, in most cases, you will get end up recording incorrect journal entries 

1. real account

All assets of a firm, which are tangible or intangible, fall under the category of ‘Real Accounts’. (Except debtors)

Tangible real accounts are related to things that can be touched and felt physically. A few examples of tangible real accounts are building, furniture, equipment, cash in hand, land, machinery, stock, investments, etc.

Intangible real accounts are related to things that can’t be touched and felt physically. A few examples of such real accounts are copyrights, intellectual property, customer data, goodwill, patents, trademarks, broadcasting rights, logos, etc.

the golden rules of real accounts

Debit what comes in

Credit what goes out

 

2. Personal Accounts

Second among three types of accounts are personal accounts which are related to individuals, firms, companies, etc. A few examples are debtors, creditors, banks, outstanding accounts, prepaid accounts, accounts of customers, accounts of goods suppliers, capital, drawings, etc.

Natural personal accounts: All of God’s creations are included in these types of personal accounts. Accounts that belong to individuals fall into this category e.g. Kumar’s A/c, Adam’s A/c, Unreal Co. A/c, etc.

Artificial personal accounts: Personal accounts which are created artificially by law, such as corporate bodies and institutions, are called artificial personal accounts. E.g. private companies, LLCs, LLPs, clubs, schools, sole proprietors, public limited companies, one-person companies, cooperative societies, etc.

Representative personal accounts: These are accounts that directly or indirectly represent a particular person or a group of people.

Consider the example of an employee whose wages are paid in advance to him/her, a prepaid wages account will be opened in the books of accounts. This wages prepaid account is a representative personal account indirectly linked to the person.

A few other examples that are related are as follows: prepaid insurance account, unearned interest account, rent received account, accrued commission account, prepaid rent account, outstanding rent, etc.

the golden rule of personal accounts

Debit the receiver

Credit the giver

3. Nominal Accounts

Accounts which are related to expenses, losses, incomes or gains are called Nominal accounts.

The dictionary meaning of the word ‘nominal’ is “existing in name only“ and the meaning is absolutely true in the accounting terms as well. There is no physical existence of nominal accounts, but money is involved behind every such account even though they have no physical form.

Example – Purchases, Sales, Salaries, Commission Received, bad bebt Telephone Bills, etc. The final result of all nominal accounts is either profit or loss which is then transferred to the capital  account

Debit all expenses and losses

Credit all incomes and gains

to summarize