rules of accounting - English & American Approach

Bookkeeping , Accounting & Accountancy

According to G.A. Lee, the accounting system has following two stages :

i) the making of routine records, in prescribed form and according to set rules, of all events which affect the financial state of the organisation; and

 ii) the summarisation from time to time of the information contained in the records, its presentation in a significant form to interested parties, and its interpretation as an aid to decision making by these parties.

Stage (i) is called Book-keeping and stage (ii) is called Accounting.

Basis	Book-keeping	Accounting
Definition	Book-keeping is thus a narrow term concerned mainly with the maintenance of the books of account and covers the first four activities listed in the scope of accounting viz., identifying the transactions and events to be recorded, measuring them in terms of money, recording them in the books of prime entry, and posting them into ledger	Accounting, on the other hand, is concerned with summarising the recorded data, interpreting the financial results and communicating them to all interested parties.
Sequence	Accounting succeeds bookkeeping.	Accounting starts where bookkeeping ends
Scope	Book-keeping has a narrower scope	Accounting has a broader scope
Level of management	Handled by lower management –clerical level for recording transactions	Handled and reviewed by senior accountant and finance department heads
Ends at	Ends at recording the transactions in the books of accounts	Not only records but also summarizes the recorded data, interprets the financial results

Accountancy-

The term 'Accountancy' refers to a systematised knowledge of accounting and is regarded as an academic subject like economics, statistics, chemistry, etc. It explains 'why to do' and 'how to do' of various aspects of accounting. In other words, while Accounting refers to the actual process of preparing and presenting the accounts, Accountancy tells us why and how to prepare the books of account and how to summarise the accounting information and communicate it to the interested parties. Thus, Accountancy is a science (a body of systematised knowledge) whereas Accpunting is the art of putting such knowledge into practice.

ACCOUNTING PROCEDURES – RULES OF DEBIT & CREDIT

• Account is a record of transaction under a particular head. It records not only the amount of transactions but also their effect and direction.
• An account is divided into two parts , i.e. ,debit and credit. It is usually in a “T” form
• DEBIT & CREDIT

Debit refers to the left side of an account and credit refers to the right side of an account.

Dr describes receiving or incoming aspect

 Cr describes giving or outgoing  aspect.

DR- asset side

Cr- Liability side

• Accounts can be classified in two ways:

Traditional Approach (English Approach)

 Modern Approach (Accounting Equation Approach or American Approach)

• CLASSIFICATION OF ACCOUNTS-

As per Traditional approach

• PERSONAL  ACCOUNTS

 Accounts which show transactions with persons are called 'Personal Accounts'. A separate account is kept in the name of each person for recording the benefit received from, or given to, the person in the course of dealings with him.

• NATURAL PERSONAL ACCOUNTS

It includes natural persons or individuals. Examples are: Krishna's Account Gopal's Account, Loan from Ramlal's Account, etc.

• ARTIFICIAL PERSONAL ACCOUNTS

Personal accounts also include accounts in the names of fums, companies or institutions such as Hiralal & Sons' Account, Nagarjuna Finance Limited Account, The Andhra Bank Account, etc.

• REPRESENTATIVE PERSONAL ACCOUNTS

'The accounts which represent expenses payable, expenses paid in advance, incomes receivable, and incomes received in advance are also personal accounts, though impersonal in name. For example, the salaries due to employees, which have not been paid before closing of the books of account for the year, is recorded in 'Salaries Outstanding Account'. It is regarded as a personal account because it represents he employees to whom salaries are payable by the business. Such a personal account is,called 'Representative Personal Account'.

 Other examples of representative personal accounts are: Interest Outstanding Account, Prepaid Insurance Account, Rent Received in Advance Account, etc.

Capital Account and Drawings account are also treated as personal accounts as they show dealings with the owner of the business.

Accounts which relate to persons i.e. , individuals , firms ,companies , debtors or creditors, etc. , are Personal Accounts.

    RULE OF DEBIT & CREDIT

    Debit the receiver

    Credit the giver

• IMPERSONAL ACCOUNTS:

• Real Accounts :

Real Accounts are the accounts which relate to tangible or intangible assets of the firm (excluding debtors). Accounts relating to properties or assets are known as 'Real Accounts'. Every business needs assets such as machinery, furniture, etc. for running its activities. A separate account is maintained for each asset owned by the business. All transactions , relating to a particular asset are recorded in the concerned asset account. Cash Account, Furniture Account, Machinery Account, Building Account, etc., are some examples of real ' accounts. They are known as real accounts because they represent things of value owned by the business

RULE OF DEBIT & CREDIT

Debit what comes in,

Credit what goes out.

• Nominal Accounts:

Accounts which relate to expenses , losses ,gains ,revenue , etc are termed as Nominal Accounts. Accounts relating to expenses, losses, incomes Ad gains are known as 'Nominal Accounts'. A separate account is maintained for each item of expense, loss; income or gain. Wages Account, Salaries Account, Commission Received Account, and Interest Received Account are some examples of nominal accounts 

RULE OF DEBIT AND CREDIT

Debit all expenses and losses,

Credit all incomes and gains.

MODERN APPROACH

• ASSETS ACCOUNTS
• LIABILITY ACCOUNTS
• CAPITAL ACCOUNTS
• REVENUE ACCOUNTS
• EXPENSE ACCOUNTS

ASSETS ACCOUNTS

Assets accounts are those accounts which relate to the economic resources of an enterprise such as Land & Building, Plant & Machinery,  Furniture, Patents, Inventory, Bank and Cash, etc.

Rule of Debit and Credit –

Debit the increases

 credit the decreases

LIABILITY ACCOUNTS

Liability accounts are accounts of lenders, creditors for goods, outstanding expenses, etc

Rule of Debit and Credit-

Debit the decreases

Credit the increases

CAPITAL ACCOUNTS –

These are the accounts of proprietorship/ partners who have invested amount in the business. It includes both Capital and Drawings Account.

RULE OF DEBIT AND CREDIT-

Debit the increases

Credit the increases

REVENUE ACCOUNTS –

These are accounts of income and gains. Example are :

Sales, Discount received, Interest received, commission received, bad debts recovered, etc

RULE OF DEBIT AND CREDIT

Debit the decreases

Credit the increases

Expense Accounts

These are the accounts of expense or losses incurred in carrying the business. Example are : Purchases, wages, depreciation, discount allowed and rent, etc.

RULE OF DEBIT AND CREDIT

Debit the increases

Credit the decreases