Fundamental principles of Accounting

Welcome Friends, you are welcome to learnvern. I am Anshu Sachan.

In the last session we saw What are books of accounts. Today, we will be seeing what types of accounting are there. And according to the type of accounting what are the rules of accounting. Okay.

We will start from the types of accounting. There are 3 main types of accounting. The very first one is a personal account. It is an account in which there are persons involved. Maybe you did not understand the meaning of persons. It might be your debtors. The debtors are the people who we give our products on credit. That means the goods that we sold are sold on credit. Then there are creditors. What does creditor mean? They are individuals from whom we have received the goods on credit. I will be paying him in maybe 30 days or 45 days, whatever that was decided between us. Okay.Now what about the government? Government is also a personal account. It is an account which involves humans or persons. So it will be known as a personal account.

 Then there is a real account. Now, there are two things in a real account. One is a bank and the other thing is cash. Okay. Now whatever transaction that you have done, if it involves bank or cash then the rules that were involved in the real account, in that way would be your entry. Okay.

The third and the last one is a nominal account. It has income and expenses. When you would be attending some MCQs in an interview exam or in an accounting exam. In the MCQs that will be there, a usual question that might be there could be, the account that is given, what kind of account is it? For instance, electricity expenses. Which kind of account is this? Is it a real account or nominal account or a personal account? As electricity is an expense, so the income and expense is always a nominal account. So, according to this, it is a personal, real and nominal account. Understood friends?

Now what we will do is, we have already decided, for this transaction, what kind of account was this. One was a personal account and one was a real account. Or if one is a personal account and one is a nominal account. Now what will happen is, according to that you need to follow the accounting rule of it. I am showing you an accounting rule that is applicable to Personal Accounting. Imagine there is a transaction, and there are two people involved in that transaction, and both of them are the personal account. Both of them are real people. Okay. Then what will happen is, a rule will be applicable, that is debit the receiver. This means that whoever is receiving will be debited. And the other is credit the giver. This means, the one who is the creditor, the one who is giving, will be credited. Do you understand me?

Suppose there is an exchange of money happening between two individuals. So the one receiving the money, I am saying, the one who is accepting the money, the receiver. That will be debited. Okay. The one giving the money, that will be credited. Understood? This will be applicable in the personal account. In the transaction where there are personal; accounts included, these rules would be applicable.

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The second one is a real account. In which, I said there would be Cash and Bank. Okay. The money goes out. Look, what is written here. Credit, what goes out. That means, when the money goes out. Then you would have to credit it. Okay. And if the money is received in the bank then, you would have to debit it. See what is written here. Debit what comes in. That means, when the money comes in, what will happen is, Debit. Debit what comes in. If the money goes out from the bank, then credit what goes out.

This whole thing is similar for the cash. If you have received some cash. Then what would be the cash, it would be income. Your reserves of the cash increases. So what will happen is Debit what comes in. So, if you have received the money, then you will have to debit it. You gave cash to someone. You might have paid for the expense or maybe you bought some materials. Then that would be credited, as the money went away from you. As in this, we credit what goes out. Understood Everything? If money comes then debit and when the money goes then credit. It can either be hard cash or from the bank. The rules are applicable for both the bank and cash, equally, which is of real account. Okay.

Now further we will be seeing, nominal account. As I told you that we learned about personal accounts, then real accounts, and now we will be seeing nominal accounts. Generally in the nominal account it includes the income and expenses. Here it is written, Expenses and Losses are always debited. Getting me? If you incur any loss or if you have made some expenses, then you should always debit it. Then, your income, or profit or your gains, you have to credit it. Understood. So, income will always be credited and the losses will always be debited. Likewise, expenses will always be debited and the gains will always be credited.

So, these were 3 types of rules, and 3 types of accounts. Don’t get confused. Look, if you have a transaction. Then you have to first identify, what accounting types are involved. Is real involved, or if personal is involved or nominal is involved. After the account type is decided then, you should decide what accounting rule should be applied. For real, real accounting rules should be applied, personal for personal and nominal for nominal. Okay

In the next session, we will be learning about the fundamental accounting assumption. As when you are writing an account. Then what are the assumptions that you should take.

Until then, Thank You.