Unit I Introduction to Basic Accounting & Bookkeeping

Introduction :
Book-keeping is related with recording of business transactions. Business enterprise and other
organizations deal in activities which involve exchange of money or money’s worth. All these
activities are recorded for the purpose of taking important decisions as to whether the activities
are feasible, profitable and are to be continued or not. Information about the business and other
organizations is required not only by the proprietors and managers of business and other
organisations but also to various other stakeholders such as the government, investors,
customers, employees and researchers.
Evolution of Accounting :
In India, during Chandragupta Maurya’s regime, Minister Kautilya wrote a book named
‘Arthashastra’, where in some references can be traced regarding the way of maintaining
accounting records. Afterwards it was called as “Deshi Nama”.
In the earlier time of civilisation, accounting was done by agents who managed the properties
of wealthy people. They prepared accounts periodically for the owners of property. The records
of debit and credit were found in the 12th century itself.
In the year 1494, Luca De Bargo Pacioli, an Italian merchant introduced Double-Entry Book
keeping system. Due to the industrial revolution in the 18th and 19th centuries, large scale
operations were carried on and Joint Stock Companies emerged as an important form of
organisation which involved separation of ownership from management. Hence, to safeguard
the interest of owners and investors, the business establishments required detailed information
about business which paved the way for development of comprehensive financial accounting
information system.
In the 20th century, the need for analysis of financial information for managerial decision
making caused emergence of Management Accounting as a separate branch of accounting.
Though accounting was individual centric in the initial stage of evolution of accounting, it has
gradually developed into Social Responsibility Accounting in the 21st century. This is due to
the vast growth in business activities as a result of development in various fields. Thus,
accounting has become inevitable in the modern world for business.
Meaning and Definition:
In simple words, the ‘Book-keeping’ means recording of the business transactions in the books
of accounts in a systematic way. All the monetary transactions are recorded datewise for
accurate business results from such records at the end of accounting year. Book-keeping is an
art or science of systematic recording, classifying and summarising the financial transactions
of business for a particular period, generally one year.
Definition of Book-Keeping
Richard E. Strahelm : “The art of analyzing and recording business transactions, reporting
results of business operations through periodic statements and interpreting such results for
purposes of effective control of future operations.”
J. R. Batliboi : “Book-keeping is an art of recording business dealings in a set of books.”
Nocth Cott: “Book-keeping is an art of recording in the books of accounts the monetary
aspects of commercial or financial transactions.”
R.N. Carter : “Book-keeping is the science and art of correctly recording in the books of
accounts, all those business transactions that results in transfer or money or money’s worth.”
Features of Book-keeping:
1) It is the method of recording day to day business transactions.
2) Only financial transactions are recorded
3) All records are prepared for a specific period which are useful for future references.
4) Records of transactions are based on rules and regulations.
5) It is an art of recording business transactions scientifically.
Objectives of Book-keeping:
1) The main objective of book-keeping is to keep a complete and accurate record of all the
financial transactions in a systematic, orderly and logical manner.
2) All the business transactions are to be recorded date wise and account wise.
3) Book-keeping serves as a permanent record of the monetary transacitons of an enterprise
business and it can be produced as evidence, whenever and wherever required
4) To know the profit or loss of the business during the financial year.
5) To know the total assets and liabilities of the enterprise.
6) To know what the businessman owes to others and what others owe to him.
7) Businessman comes to know the current year’s progress over previous year and compares
its financial results with other business enterprise in similar line.
1.4 Meaning and Definition of Accountancy:
Book-keeping is a part of accounting. It is the primary stage in accounting. It is the process of
recording transactions in the books of accounts. Accounting is part of Accountancy.
Accountancy is the practice of recording, classifying, and reporting of business transactions for
a business. Accounting principles are the basic norms and assumptions developed and
established as the basis for accounting system. These principles are adopted by the accountants
universally.
Definitions:
1) “Accountancy refers to the entire body of the theory and process of accounting.” By Kohler.
2) Prof. Robert N. Anthony has defined accounting as “Nearly every business enterprise has
an accounting system. It is a means of collecting,summarizing, analyzing and reporting in
monetary terms information about the business transactions.”
1.5 Basis (Methods) of Accounting System
Basis of Accounting: There are mainly three basis or methods of accounting in common
usage, namely
(i) Cash basis
(ii) Accrual or Mercantile basis
(iii) Mixed or Hybrid basis.

(i) Cash basis :

Under the cash basis of accounting, actual cash receipts and actual cash payments are recorded.
In this basis, revenue is recognised when cash is received and expenses are recognised when
cash is paid. e.g. (i) Any income received, (ii) Any expense paid. Such a method of accounting
is usually followed by professionals such as Doctors, Lawyers, Chartered Accountant (CA) and
Not for Profit Organisations.
(ii) Accrual or Mercantile basis
Under accrual basis of accounting, the revenue whether received or not, but has been earned or
accrued during the accounting period and expenses incurred whether paid or not are recorded.
In other words, revenue is recognised when it is earned or accrued and expenses are recognised
when these are incurred. e.g. (i) Any income earned whether received or not, (ii) Any expense
incurred whether paid or not.
(iii) Mixed or Hybrid basis
It is a combination of cash basis and accrual basis of accounting. Under mixed basis of
accounting, both cash basis and accrual basis are followed. Revenues and assets are generally
recorded on cash basis whereas expenses are generally taken on accrual basis. The laws in India
prohibits the use of this method.
DISTINCTION BETWEEN BOOK-KEEPING AND ACCOUNTING
Some people mistake book-keeping and accounting to be synonymous terms, but in fact they
are different from each other. Accounting is a broad subject. It calls for a greater understanding
of records obtained from book-keeping and an ability to analyze and interpret the information
provided by book-keeping records. Book-keeping is the recording phase while accounting is
concerned with the summarizing phase of an accounting system. Book-keeping provides
necessary data for accounting and accounting starts where book-keeping ends.
Sr.
BOOK-KEEPING ACCOUNTING
No.
1 It is a process concerned with recording It is a process concerned with summarizing
of transactions. the recorded transactions.
2 It constitutes a base for accounting It is considered as a language of the
business
3 Financial statements do not form part of Financial statements are prepared in this
this process. process on the basis of book-keeping
records.
4 Managerial decisions cannot be taken Management takes decisions on the basis of
with the help of these records. these records
 5 There is no sub-field of book- keeping. It has several subfields like financial
accounting, management accounting etc
6 Financial position of the business cannot Financial position of the business is
be ascertained through book-keeping ascertained on the basis of the accounting
records. reports

Basic Accounting Terminologies

In order to have better understanding of accounting, it is necessary to know the meanings of
certain basic terms used in accounting. Accounting is a versatile system which serves a large
number of purposes in the modern business world. Hence, the following terminologies need to
be understood.
Transactions: Exchange of goods and services between two persons or parties for money or
money's worth is known as Transactions.
(a) Monetary Transactions:
The transaction which involves an exchange of money or money’s worth directly or indirectly
is called monetary transactions. Only monetary transactions are recorded in the books of
accounts.
1) Cash Transactions: A business transaction in which cash is paid or received immediately
is known as cash transaction.
e.g i) Purchase of goods for cash at ` 15,000/-
ii) Payment of salary at ` 5,000/
2) Credit Transactions: A credit transaction is one in which cash is not paid or received
immediately at the time of a transaction but it is paid or received at a later date.
e.g i) Goods sold on credit to Mr. Aman at ` 8,000/
ii) Sold machinery to Mr. Amarsingh on credit at ` 20,000/
(b) Non-Monetary Transactions:
The transaction which does not involve an exchange of money or money’s worth directly or
indirectly are called non-monetary transactions. An exchange of one thing against another
thing is called as Barter transactions.
1) Entry: Recording of a business transaction in the proper form or method in the books of
accounts is called an entry.
2) Narration: A brief explanation of the business transaction for which an entry is passed is
called as a narration. It is always given in a bracket below the journal entry and it usually starts
with the word "Being" or "For".
3) Goods: The term ‘goods’ refers to merchandise, commodities, articles or things in which a
trader trades. These are purchased or manufactured for the purpose of sale and to earn profit.
e.g i) Medicines are goods for the chemist.
ii) Vegetables are goods for the vegetable vendor.
iii) Parts like tyres, engine gearbox, cables are produced by a vehicle manufacturer like Bajaj
Auto, Hero Motors.
Capital and Drawings:
a) Capital : The total amount invested into the business by the owner is called capital. Excess
of assets over the liabilities is also called as capital. The equation for this is :
Capital = Assets – Liabilities
Capital is a liability of the business as this amount is payable by the business enterprise to the
owner at the time of closure of the business.
b) Drawings : The amount of cash or value of goods, assets, etc., withdrawn from the business
by the owner for personal use called as drawings.
E.g. : A proprietor pays colleges fees of his son, or pays for his medical expenses, mobile bills
etc, from the business.
Debtors and Creditors:
a) Debtor : A person who has to pay to the business for getting goods and services on credit
is known as debtor. A debtor is a person who owes money to the business.
b) Creditor: A person to whom business has to pay for getting goods or services on credit is
known as creditor. A creditor is a person to whom business owes money.
c) Bad Debts : An irrecoverable amount from a debtor is known as "Bad Debts". It is a revenue
loss to the business
Expenditure and Types of Expenditure
Expenditure: An amount spent by the business for any consideration received by business is
called expenditure.
i) Capital Expenditure : This expenditure is incurred to acquire fixed asset or to increase the
value of fixed asset. It gives the benefit for a long period of time and it is non-recurring in
nature. E.g. : Purchase of Machinery, extension of building, purchase of computer etc.
ii) Revenue Expenditure : Revenue expenditure is an expenditure from which no future
benefit is expected but having immediate or short term benefit may be less than one year. It
does not increase profit earning capacity of an organization. These are normal day to day
operating expenses of a business organization and appear on the debit side of Trading A/c or
Profit and Loss A/c. E.g. : Rent paid, Salary paid, Wages paid etc.
iii) Deferred Revenue Expenditure: An expenditure which is basically revenue in nature but
benefit of which is not exhausted within one year is called as Deferred Revenue Expenditure.
Such expenditure is written off over number of years. Such written off amount is shown on
debit side of profit and loss a/c and unwritten amount is shown on asset side of the Balance
Sheet.E.g. : Heavy expenditure on advertising , heavy legal expenses.
Cash Discount and Trade Discount :
 Discount is a concession or allowance given by the seller to purchaser. There are two types of
discounts.
i) Trade Discount : It is an allowance given on catalogue price or list price of goods. This
discount is allowed at the time of purchase/sale of goods. Value of goods purchased/sold
recorded is net value payable i.e after deduction of amount of trade discount allowed. If goods
of ` 1000/- are sold at 5% trade discount, the value of goods that will be recorded will be ` 950/-
both by the purchaser and the seller and not ` 1000/-. Hence, trade discount does not appear in
the books of accounts separately
ii) Cash Discount: It is the amount deducted from the final amount due at the time of receipt.
It is the concession given for encouraging prompt payment. It is given either for the spot
payment or for payment within a specific period. Cash discount is calculated after deducting
trade discount, since it is loss to the seller and gain to the buyer, cash discount appears in the
books of accounts.
Solvent and Insolvent:
i) Solvent: If a person’s assets are more than his liabilities, or equal to his liabilities, he is
called as a solvent person. Solvent person is financially sound and is in a position to pay off all
his debts.
E.g. : A person’s total assets have been calculated to ` 50,00,000/- and his total debts were
30,00,000/- since his position is sound he is able to pay off his debts therefore he is called
Solvent.
ii) Insolvent: A person whose liabilities are more than his assets is an insolvent person. Such
person’s liabilities are more than his assets.E.g. : A person’s total assets or property have been
calculated to ` 20,00,000/- and his total debts were ` 50,00,000/- and if he is not in a position
to get any amount from any sources and if the court is so satisfied then he will be declared as
an insolvent person.
Accounting Year:
It is the period of 12 months for which accounts are maintained and closed by the proprietor.
Earlier the proprietors were following any accounting year i.e. calendar year , or financial year
or any other year as per tradition. But now for income tax purpose an accounting year starts on
1st April and end on 31st March. At the end of accounting year a proprietor has to prepare
Trading account, Profit and Loss account and Balance Sheet to find out the financial position
of the business.
Trading Concern and Not for Profit Concerns.
i) Trading Concern: A business concern established with an object of earning profit by selling
goods is known as Trading concern. It is also called as commercial organization or profit
making organization.
ii) Not for Profit Concern: It is an organization not established for making profit but for
rendering services to the society. An organization may be formed for promoting a useful object
like art, science, sports, culture, charity, profession etc. e.g Schools, Hospitals, Sports Club etc.
Goodwill:
Goodwill may be described as the aggregate of those intangible attributes of a business which
contributes to its superior earning capacity over a normal return on investment. It may arise
from such attributes as favourable locations, the ability and skill of its employees and
management, quality of its products and services, customer satisfaction [Link] is the
reputation of business expressed in terms of money. Goodwill is an intangible asset
Profit or Loss
a) Profit : When the selling price of goods is more than the cost price it is a profit. Profit
increases the capital of the business.e.g. If goods are sold for ` 50,000/- and all expenses
during the period amounted to 30,000/- then the profit is ` 20,000/
b) Loss : When cost price of goods is more than its selling price it is a loss. Loss decreases the
capital of business e.g If goods are sold for ` 50,000/- and all expenses during the period
amounted to 60,000/, then the loss will be ` 10,000/
c) Income: It is revenue arising as a result of business transactions. It is the amount receivable
or realised from services provided and earnings from interest, dividend, commission, etc.
d) Revenue: It is income that a business has from its normal business activities usually from
the sale of goods and services to customer.
Assets, Liabilities, Net Worth:
i) Assets : Any physical thing or right owned that has a monetary value is called as an asset.
The ownership of the Asset must be with business unit. E.g Land, Goodwill, Patents,
Computers etc.
Types of Assets:
a) Fixed Assets/Non current Assets : The assets which give long term benefit to the business
are known as fixed assets e.g Land and Building, Plant & Machinery, Goodwill etc. These
assets may be tangible or intangible.
b) Current Assets : Assets which are held in the business for the operating year and can be
converted into cash very easily are called as current assets. e.g Debtors, Bills Receivable Cash
in Hand, Cash at Bank, Stock etc.
c) Fictitious Assets : These assets are not represented by tangible possession or property. They
are imaginary assets but do not have any realisable value. e.g Deferred revenue expense like
advertisement paid for 4 years.
ii) Liabilities: Amount payable by the business to others is known as liability. It is a debt or
amount due from the business to others for the benefit received by the business unit. e.g Loan
taken, Creditors, Bank Overdraft, Outstanding Expenses etc.
Types of Liabilities:
a) Fixed Liabilities : One of the major source of funds in the business is fixed liabilities. It
may be in the form of capital, secured loans, long term loans from banks and from f inancial
institutions etc.
b) Current Liabilities: Short term liabilities payable within a year are called current liabilities.
Current liabilities arise in the regular current operations of the business. These liabilities are
not normally secured. E.g. Creditors, Bills Payable etc.
iii) Net worth or Owners Equity or Capital:
The amount or funds provided by the proprietor in the business is called as “Capital” as well
as the excess of assets over liabilities of the business is also known as “Capital” or “Net Worth”.
Net worth includes Capital and Reserves. Capital can be in the form of cash or in kind.
Contingent Liabilities:
A liability which may arise in future depends on happening or non-happening of certain event
is called as contingent liability. As it is not confirmed or perfect liability, it does not affect the
financial position of the business and therefore, it is not shown on the liability side of the
Balance Sheet. But it is shown by way of foot note to Balance Sheet simply as information.
e.g. A worker makes a claim for compensation of ` 5,000/- against the business and the decision
is pending in the court. It may be a future liability for business on happening of an event i.e
“Court Verdict.
Accounting Concepts, Conventions and GAAP (Generally Accepted
Accounting Principles)
Meaning
Accounting is means of communicating the results of business operations to various parties
interested in or connected with the business viz., the owners, creditors, investors, banks and
financial institutions, Government and other agencies. Hence, it is rightly called as the language
of business. Accounting is not only associated with business, but also with everybody, who is
interested in keeping an account of the monetary transactions. Generally, the term 'accounting'
refers to financial accounting. Book-keeping and Accountancy is an art of recording,
classifying and summarizing transactions of business cocern in a systematic manner.
Some of the important concepts are as follows :
1) Business Entity: This concept implies that a business unit is separate and distinct from the
owner or owners, that is, the persons who supply capital to it. Based on this concept, accounts
are prepared from the point of view of the business and not from the owner's point of view.
Hence, the business is liable to the owner for the capital contributed by him/her. According to
this concept, only business transactions are recorded in the books of accounts. Personal
transactions of the owners are not recorded. But, their transactions with the business such as
capital contributed to the business or cash withdrawn from the business for the personal use
will be recorded in the books of accounts. It implies that the business itself owns assets and
owes liabilities. e.g. Half of the building is used for business office and other half of the
building is used for the residence of the proprietor. It the total rent of the building is ` 50,000/-
then only ` 25,000/- will deducted as drawings from proprietor’s capital.
2) Money Measurement: This concept implies that only those transactions, which can be
expressed in terms of money, are recorded in the books of accounts. Since money serves as the
medium of exchange transactions expressed in money are recorded and the ruling currency of
a country is the measuring unit for accounting. Transactions which do not involve money will
not be recorded in the books of accounts. For example, working conditions in the work place,
strike by employees, efficiency of the management, etc. will not be recorded in the books, as
they cannot be expressed in terms of money. It helps in understanding of the state of affairs of
the business as money serves as a common measure by means of which heterogeneous facts
about the business are [Link] example, if a business has 5 computers, 2 tables and 3
chairs, the assets cannot be added to give useful information, unless, they are expressed in
monetary terms ` 1,50,000/- for computers, `15,000/- for tables and ` 2,500/- for chairs.
3) Cost Concept : An asset is recorded in the books on the basis of the historical cost, that is,
the acquisition cost. Cost of acquisition will be the base for all further accounting. It does not
mean that the asset will always be shown at cost. It is recorded at cost at the time of its purchase,
but is systematically reduced in its book value by charging depreciation.
e.g. : Furniture is purchased for ` 3,00,000/- and same cost has been recorded in the books. In
case the market value goes to ` 1,00,000/- or ` 1,50,000/- It will not be considered.
4) Consistency Concept: Any policy adopted for accounting should be continuous or
consistent throughout the business and it need not be changed generally unless and until
circumstances demand. However, it does not stop any improvement of new techniques. But
that should be disclosed with a note.
e.g. : A company adopts fixed instalments method for charging depreciation on fixed asset
from the beginning till the end of estimated life of asset.
5) Conservatism: While recording the business transactions we have to anticipate no profit
but provide for all possible losses. It encourages the certain secret reserves by making excess
provision to prevent losses. The income statement may show lower income and the Balance
Sheet overstates the liabilities and understates the assets. This policy of recording is asking the
accountant ‘to play safe’ while writing the accounts.
e.g. : The closing stock in the factory is valued at ` 25,000/- at cost price and ` 35,000/- at its
market price. But while recording in the books the value of ` 25,000/- will be considered being
the lowest of all.
6) Going Concern: It is the basic assumption that business is a going concern and will continue
its operations for future. Going concern concept influences accounting practices in relation to
valuation of assets and liabilities, depreciation of the fixed assets, treatment of outstanding and
prepaid expenses and accrued and unearned revenues. For example, assets are generally valued
at historical cost. Any increase or decrease in the value of assets in the short period is ignored.
7) Realization: Income is recorded only when it is realized i.e. either it is received or earned.
Revenues are recorded only when sale are affected or the services are rendered. Sales revenues
are considered as recognized when sales are affected during the accounting period irrespective
of the fact whether cash is received or not.
e.g. : A company gets an order for sale of goods ` 1,00,000/- in May 2017. Goods of only
60,000/- are sold and delivered in June 2017. Cash is received for ` 60,000/- in Sept, 2017.
As per the principle of realization, sale is to be recorded in June 2017.
8) Accrual: Income is recorded when it accrues(earned) and expenses are recorded when they
accrue(become payable). All expenses and revenues related to the accounting period are to be
considered irrespective of the fact the revenues are received in cash or not or expenses are paid
in cash or not. e.g. : A company invested ` 100,000/- with a bank for one year on 1stOct 2015,
Bank has to pay interest at 10% p.a on its maturity i.e 30th Sept, 2016.
9) Dual Aspect : According to this concept, every transaction or event has two aspects, i.e.,
dual effect. For example, when Akshay starts a business with cash ` 5,00,000/- , on one hand,
the business gets cash of ` 5,00,000/- and on the other hand, a liability arises, that is, the
business has to pay Akshay a sum of ` 5,00,000/-. This is the concept which recognizes the
fact that for every debit, there is a corresponding and equal credit. This is the basis of the entire
system of double entry book-keeping. From this concept the basic accounting equation, arises
that is, Capital + Liabilities = Assets.
10) Disclosure: The accounts must disclose all material information. The accounting reports
should disclose full and fair information to the related parties. The financial position and
performance should be disclosed very honestly to all the users. The financial position means
the Balance Sheet of the business and financial performance means business results in terms
of profits or losses and income and expenses in profit and loss account. All the information
disclosed should be relevant, reliable, comparable and understood by all the concerned
authorities.
11) Materiality: According to this convention, financial statements should disclose all
material items which might influence the decisions of the users of financial statements. Hence,
any item which is not significant and is not relevant to the users need not be disclosed in the
financial statements. This principle is basically an exception to the full disclosure principle.
The term materiality is subjective in nature. Materiality depends on the amount involved in the
transaction, size of the business, nature of information, requirements of the person making
decision, etc. An item material to one person may be immaterial to another person.
12) Matching Concept: According to this concept, revenues during an accounting period are
matched with expenses incurred during that period to earn the revenue during that period. This
concept is based on accrual concept and periodicity concept. Periodicity concept fixes the time
frame for measuring performance and determining financial status. All expenses paid during
the period are not considered, but only the expenses related to the accounting period are
considered. On the basis of this concept, adjustments are made for outstanding and prepaid
expenses and accrued and unearned revenues. Also due provisions are made for depreciation
of the fixed assets, bad debt, etc., relating to the accounting period.

Meaning and Definition of Double Entry Book-Keeping:

Double Entry Book-keeping System is the most scientific method of recording all monetary
transactions in the books of accounts. This system owes its origin to Italian Merchant “LUCA
D. BARGO PACIOLI” on 10th November 1494 and this day is celebrated as International
Accounting Day. This system of Book keeping is based on the fact that there are two aspects
of every business transactions. Every business transaction involves two persons or accounts or
parties where in one is the receiver of the benefit and the other is the giver of the benefit. If
something comes into the business, something goes out from the business. Recording of two
aspects of monetary transactions in the Books of Account in terms of Debit (Dr.) and Credit
(Cr.) is called as "Double Entry" System of Book-keeping.
Definition of Double Entry System

“Every business transaction has a two fold effect and that it affects two accounts in
oppositedirections and if a complete record is to be made of each such transaction it would be
necessary to debit one account and credit another account. It is this recording of two fold effect
of every transaction that has given rise to the term Double Entry.” – J.R. Batliboi.
Principles of Double Entry Book-keeping System:
1) In every business transaction there must be minimum two effects i.e debit and credit.
2) Two Accounts means one is the Receiver of the benefit and other is the Giver of the benefit.
3) If one account is debited other account must be credited.
4) Every debit has a equal and corresponding credit of the same amount.

Advantages of Double Entry Book-keeping System:

1) Complete Record: Under this system all business transactions are recorded. This method is
scientific and records both the aspects of each transaction.
2) Accuracy: In this system both aspects are recorded in the books of accounts so it gives
complete accuracy in accounting work. It also checks arithmetical accuracy.
3) Business Results: All expenses, losses, income, gains, liabilities, assets, debtors and creditors
all these transactions are recorded, therefore it helps to find out accurate business results of
particular accounting period.
4) Common Acceptance:It is widely accepted since it follows universal accounting principles.
Double Entry System is accepted by financial institutions, government authorities etc

Classification of Accounts :
Meaning of Account: An account is a summarized record of transactions relating to a particular
person, asset, liability, particular head of expense or income recorded at one place. In day to
day business activity large number of business transactions takes place. It affects the several
accounts. At the end of certain period of time, it is necessary for the businessman to balance
the accounts to find out the information. like total capital, total liabilities and assets , total
incomes and expenses etc. of the business.

Each type of accounts is explained below with examples

1) Personal Accounts :This account represents a person and group of persons with whom
business deals. These accounts are classified into following three categories:
a) Natural Person's Account: Accounts relating to individual human beings. for e.g.
Rajesh’s A/c, Sumit's A/c, Sushma's A/c, Vaibhav’s A/c etc.
b) Artificial Person's Account: Artificial persons means includes accounts of organizations,
associations which are created by law, for E.g. Bank of Maharashtra A/c, ABC & Co A/c,
Recreation Club A/c.
c) Representative Personal Account: These Accounts represent a certain person or group of
person in business dealing. Accounts relating to outstanding and prepaid items are called
representative personal account E.g. Outstanding Rent A/c, Income received in advance A/c,
Prepaid Wages A/c etc.

2) Impersonal Account: Impersonal Accounts are classified into following two categories;-
Real Accounts: This account represents assets and properties owned by the business. The
following are the types of Real Account.
a) Tangible Real Account:
Tangible real account means the Assets and properties, which can be seen, touched and felt.
e.g. Machinery A/c, Motor Car A/c, Stock of Goods A/c etc.
b) Intangible Real Account:
Intangible Real account means assets which cannot be seen, touched, or felt but they can be
measured in terms of money e.g. Goodwill A/c, Patents A/c, Trademark A/c, Copyright
A/c etc.
3) Nominal Accounts: The account of expenses, losses, income and gains are called as
Nominal accounts e.g. Wages A/c, Stationery A/c, Salary A/c, Depreciation A/c Commission
Received A/c, Discount Received A/c etc.

Debit and Credit

Debit (Dr.): Left hand side of an Account is called Debit (Dr) side.
Credit (Cr): Right hand side of an Account is called Credit (Cr) side.

Golden Rules of Debit and Credit (Traditional Approach)

Debit what comes in
1 Real Account
Credit what goes out

Debit the receiver

2 Personal Account
Credit the giver

Debit all expenses & Losses

3 Nominal Account
Credit all Income & Gain
Classification of Accounts (Modern approach)
 Classifictation of Accounts (Modern
approach)

Debit Credit

Assets/Expenses/ Increase Decrease

Losses

Liabilities/Inco Decrease Increase

me/Gain/Capital

Q.1 Classify the following accounts into Personal, Real and Nominal accounts.
1) Stationery A/c 2) Mahesh's A/c 3) Machinery A/c
4) Capital A/c 5) Loss by Fire A/c 6) Pune Municipal Corp.
A/c 7) Building A/c 8) Bank of Maharashtra A/c 9) Copyright A/c
10) Repairs A/c 11) Laptop A/c 12) Wages A/c

Q.2 Classify the following accounts under Assets, Liabilities, Income and Expenditure.
1) Prepaid Rent 2) Salary A/c 3) Bank Loan A/c
4) Motor Car A/c 5) Rent Payable A/c 6) Bad Debts A/c
7) Copyright A/c 8) Interest Received A/c 9) Dividend Received A/c
10) Premises A/c 11) Insurance Premium A/c 12) Audit Fees A/c

Q.3 Classify the following accounts under Assets, Liabilities, Income and Expenditure.

1) Land and Building 2) Interest Received 3) Computer

4) Sundry Creditors 5) Bills Receivables 6) Discount Allowed
7) Sundry Debtors 8) Goodwill 9) Freight
10) Discount Received 11) Bills Payable 12) Amit`s Capital
13) Interest on Fixed deposit. 14) Bank Overdraft 15) Live Stock
16) Printing & Stationery 17) Cash at Bank 18) Rent Received
19) Repairs & Maintenance 20) Carriage 21) Outstanding Rent
22) Commission Received 23) Bank Loan 24) Electricity Bill