Basic Accounting Concepts

The transactions of any business are divided into three parts. They are:

• Transactions related to Things
• Transactions related to Persons
• Transaction related to Income & Expenditures

 In accountancy, we have three types of accounts i.e.  Real, Personal & Nominal

Real Accounts (Transactions related to Things) : It includes "real things" in the business e.g. assets. Category of transactions related to Real accounts ex: Items, buildings, machinery, cash etc.

In real accounts any increment in assets held by the entity is reflected by debiting (increasing) the relevant asset account and depletion by crediting (decreasing) the asset account.

If any asset account is debited then it is on account of increment in the value of the asset. The acquisition of that asset is matched by a liability (e.g. promise of payment) or owner's equity (e.g. cash) which decreases the resources held by the entity.

RULE: Debit what comes in and credit what goes out.

Personal Accounts(Transactions related to Person): Personal accounts refers to all the transactions related to natural persons, artificial  persons  and  representative  persons  ex:- rama, ravi, andhra bank, outstanding rent. 

RULE : Debit the receiver and credit the giver.

Nominal Account (Transaction related to Income & Expenditures) : Nominal accounts includes all the transactions related to expenditures, incomes, losses and profits . ex:- rent paid, rent received, bad debts, profit on sale of an asset.

RULE: Debit all expenses and losses and credit all incomes and profits.

Sales comes in Credit Side

When untrained people attempt their own bookkeeping, it's usually the Debits and Credits that mess them up. It's called double-entry bookkeeping for a reason. When a transaction occurs, at least two accounts must be involved.

The general idea is to consider each transaction (or entry) as amounts that will either increase or decrease specific accounts, i.e your bank, revenue and expense,. First things first, create a list of accounts you will need, known in accounting as the Chart of Accounts. Depending on the type of account, an increase can be a debit or a credit. This is where it gets tricky.

HINT: an entry can have two increases, two decreases or an increase and a decrease, as long as the debits and credits equal in value, the transaction will balance.

And finally, don't try and compare the debits and credits with what is showing on your bank statement, which will definitely confuse the issue, because when you put money in the bank, the bank statement will show this as a credit, whereas in your books, this increase to the bank is actually a debit. Just try and remember the bank is always the opposite.

Typical Types Of Business Transactions and the Debits and Credits and Accounts Used To Record Them 

In a typical business transaction we get something and we give up something.

Sale  -Sell goods and/or services

Cash Sale -customer pays at the time of sale The business gets cash or a cheque from their customer and gives up a product or service to their customer. Accounts Used: Debit: Cash    Credit: Sales On Account Sale-business allows the customer time to pay The business gets a promise to pay from their customer and gives up a product or service to their customer.  Accounts Used: Debit: Accounts Receivable    Credit: Sales Purchase goods and/or services Cash Purchase -business pays the supplier at the time of purchase The business gets a product or service from their supplier and gives up cash or a cheque to their supplier. Accounts Used: Debit: Expense or Inventory Account    Credit: Cash On Account Purchase-supplier allows the business time to pay The business gets a product or service from a supplier and gives up a promise to pay to their supplier.            Accounts Used:           Debit: Expense or Inventory Account              Credit: Accounts Payable Pay Supplier Charge Purchases -pay suppliers for products and/or services that we promised to pay for later (charge).          Accounts Used:         Debit: Accounts Payable            Credit: Cash Receive Customer Charge Payments -Receive payments from a customer that promised to pay us later (charge sale). The business gets cash or a cheque from their customer and gives up (reduces the amount of) their customer's promise to pay.           Accounts Used:          Debit: Cash             Credit: Accounts Receivable Borrow Money (Loans) The business gets cash or equipment and gives up a promise to pay.           Accounts Used:          Debit: Cash or Equipment             Credit: Note Payable Repay a Loan : The business gets the amount of their promise to pay reduced and gives up cash or a check.          Accounts Used:         Debit: Note Payable            Credit: Cash Draw : The business gets the owner's claim to the business assets reduced and gives up cash or a check.           Accounts Used:          Debit: Owner's Draw             Credit: Cash Payroll : The business gets services from their employees and gives up a check.           Accounts Used:           Debit: Salary & Wages Expense             Credit: Cash

General ledgers

General Ledger is the term for the comprehensive collection of T-accounts (so called because there was a pre-printed vertical line in the middle of each ledger page and a horizontal line at the top of each ledger page, like a large letter T). Before the advent of computerised accounting, manual accounting procedure used a book (known as a ledger) for each T-account. The collection of all these books was called the general ledger.

"Day Books" or journals are used to list every single transaction that took place during the day, and the list is totalled at the end of the day. These daybooks are not part of the double entry book keeping system. The information recorded in these daybooks are then transferred to the general ledgers. Modern computer software now allows for the instant update of each ledger account – for example, when recording a cash receipt in a cash receipts journal a debit is posted to a cash ledger account with a corresponding credit in the ledger account for which the cash was received. Not every single transaction need be entered into a T-account. Usually only the sum of the daybook transactions (a batch total) for the day is entered in the general ledger.


The Five Accounting Elements

There are five fundamental elements within accounting. These elements are as follows: Assets, Liabilities, Equity, Income and Expense. Income is also called Revenue. The five accounting elements are all affected in either a positive or negative way. It is important to note that a credit transaction does not always dictate a positive value or increase in a transactions and similarly, a debit does not always indicate a negative value or decrease in a transaction. An Asset account is often referred to as a "debit account" due to the account's standard increasing attribute on the debit side. When an asset (e.g. an espresso machine) has been acquired in a business, the transaction will affect the debit side of that asset account illustrated below:

Asset
Debits (Dr)	Credits (Cr)
X               |

The "X" in the debit column denotes the increasing effect of a transaction on the asset account balance (total debits less total credits), because a debit to an asset account is an increase. The asset account above has been added to by a debit value X, i.e. the balance has increased by Rs. X or Rs. X. Likewise, in the liability account below, the X in the credit column denotes the increasing effect on the liability account balance (total credits less total debits), because a credit to a liability account is an increase.


All "mini-ledgers" in this section show standard increasing attributes for the five elements of accounting.

Liability
Debits (Dr)	Credits (Cr)
	| X

Expenses
Debits (Dr)	Credits (Cr)
X              |

Equity
Debits (Dr)	Credits (Cr)
|	X

Summary table of standard increasing and decreasing attributes for the five accounting elements:

ACCOUNT TYPE	DEBIT	CREDIT
Asset	+	−
Liability	−	+
Income	−	+
Expense	+	−
Equity	−	+