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Types of Accounts: Basically accounts are three types,
ü Personal account: Accounts which show transactions with persons are called personal account. It includes accounts in the name of persons, firms, companies.
In this: Debit the reciver
Credit the giver.
For example: - Naresh a/c, Naresh&co a/c etc…
ü Real account: Accounts relating to assets is known as real accounts. A separate account is maintained for each asset owned by the business.
In this: Debit what comes in
Credit what goes out
For example: - Cash a/c, Machinary a/c etc…
ü Nominal account: Accounts relating to expenses, losses, incomes and gains are known as nominal account.
In this: Debit expenses and loses
Credit incomes and gains
For example: - Wages a/c, Salaries a/c, commission recived a/c, etc.
Accounting conventions: The term convention denotes customs or traditions which guide the accountant while preparing the accounting statements.
ü Convention of consistency: Accounting rules, practices should not change from one year to another.
For example: - If Depreciation on fixed assets is provided on straight line method. It should be done year after year.
ü Convention of Full disclosure: All accounting statements should be honestly prepared and full disclosure of all important information should be made. All information which is important to assets, creditors, investors should be disclosued in account statements.
Trail Balance: A trail balance is a list of all the balances standing on the ledger accounts and cash book of a concern at any given date.The purpose of the trail balance is to establish accuracy of the books of accounts.
Trading a/c: The first step of the preparation of final account is the preparation of trading account. It is prepared to know the gross margin or trading results of the business.
Profit or loss a/c: It is prepared to know the net profit. The expenditure recording in this a/c is indirect nature.
Balance sheet: It is a statement prepared with a view to measure the exact financial position of the firm or business on a fixed date.
Outstanding Expenses: These expenses are related to the current year but they are not yet paid before the last date of the financial year.
Prepaid Expenses: There are several items of expenses which are paid in advance in the normal course of business operations.
Income and expenditure a/c: In this only the current period incomes and expenditures are taken into consideration while preparing this a/c.
Royalty: It is a periodical payment based on the output or sales for use of a certain asset.
For example: - Mines, Copyrights, Patent.
Hirepurchase: It is an agreement between two parties. The buyer acquires possession of the goods immediately and agrees to pay the total hire purchase price in instalments.
Hire purchase price = Cash price + Interest.