Accounting Basics

There are mainly three type of accounts in accounting: Real, Personal and Nominal accounts.

Real Accounts:

Accounts related to assets (tangible or intangible) come under the category of real accounts. 

Golden rule for real accounts:

Debit - What comes in

Credit - What goes out

Again real account is classified into 3 types:

1. Assets:   Assets = Liabilities + Equity

• Assets (what a business owns) = Liabilities (what a business owes) + Equity (money invested, made, or taken out of the business).

2.Liabilities:  

• Liabilities are financial obligations a business owes to other persons, businesses and governments. 
• Short-term liabilities are financial obligations that become due within a year, while long-term liabilities are due in a year or longer.
  

3. Equity:    Equity = Assets - Liabilities 

• Equity is the owner's value in an asset or group of assets.
• As an example, a company with total assets valued at 1,000 Crores, may have debt (liabilities) valued at 900Cr, in which case the owner's value in the assets is 100Cr, representing the company's equity.
  

Personal Account:

• Accounts related to persons (living or non living) are called personal accounts.
• Some are living like us  and some are artificial which do not have a living existence but have a separate legal existence.Thus in accountancy we classify persons into Natural Persons and Artificial Person.

Golden rule for personal accounts:

Debit - The receiver

Credit - The giver

Nominal Account:

• These are the accounts related to incomes and expenditures of a business entity. 
• Expenditure or expenses are the amount paid or payable which has given its benefit to the business in the revenue year.

Golden rule for nominal accounts:

Debit - All expenses & losses

Credit - All incomes & gains

Example: Salaries, Wages, Carriage, Transportation, Rent, Electricity, Stationary, Taxes, Commission paid, Interest paid etc.

Nominal account is divided into 2 types:

Net Income = Revenue - Expenses

1.  Income / Revenue Account:

• Revenue is money that goes into the business as a result of goods or services sold.
  

2. Expense Account:

Expenses are money that goes out of a business to pay for operations.