How to Classify Accounts in Double Entry System

here is a big question that how to classify accounts in accounting as per the traditional approach in double entry system in accounts that there are three types of accounts, namely, Personal accounts, Real Account and Nominal Accounts which are opened to keep a complete record of all the financial transactions of the business.

Classification of Accounts 

• Natural Person’s Personal Account: An account recording transactions with an individual human being is known as a natural person’s Personal Account, for example, Ram’s Account
• Artificial Person’s Personal Account: An account recording financial transactions with an artificial person created by law or otherwise is called an Artificial Person’s Personal Account, Like Ram Kumar and Sons. Or Suresh Kumar and Co. 
• Representative Personal Account: An account indirectly representing a person or persons is known as a representative personal account. When accounts are of a similar nature and their number is large, it is better to group them under one head and open a representative personal account. For example, such types of accounts can be salaries account Outstanding Accounts, etc.
• Tangible Real Account: such types of accounts relates to an asset which can be touched, felt, seen, and measured e.g. Machinery Account, Cash Account Stock Account, etc.
• Intangible Real Account: Such type of account related to an asset which cannot be, touched physically but can be measured in value. For example Goodwill Account, Trademarks Accounts, etc. 

Few more examples to clarify the types of accounts: 

Drawing Account = Personal Account

Cash Account = Real Account 

Discount Account = Nominal Account 

Salaries Account = Nominal Account 

Bad Debts Account = Nominal Account 

[Also Like: What is Double Entry System in Accounts ]

Who Prepares Manufacturing Account

Who prepares the manufacturing account instead of the Trading and Profit and Loss accounts that are

the main question. Those concerns which convert raw materials into finished goods are required to find out the cost of goods manufactured besides gross and net profit of the concern. These are manufacturing cum trading concerns. In order to have full information about the cost of goods manufactured these concerns firstly prepare the Manufacturing account and then prepare the trading and Profit and Loss accounts. The Debit side of the manufacturing account starts with the cost of materials consumed, (i.e. Opening Stock of raw materials plus net purchases less the closing stock of raw materials) Procurement cost e.g. custom duty, landing Charges, and excise duty, etc should also be included with the cost of raw materials. Closing stock is taken and valued at a lower cost or net realizable value and then deducted from the sum of opening stock and purchases to eliminate the charge to manufacturing account for the stock of raw materials in hand on the closing date. Next to materials are listed productive wages and direct expenses

The main object of Manufacturing Account

1. Cost of finished goods produced
2. Constituent items thereof such as cost of material consumed, Productive wages, Direct and Indirect expenses

So it is clear from the above discussion that manufacturing accounts are prepared to know the cost of goods produced So we can say that this is the purpose and use of the manufacturing accounts 

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What is Double Entry System in Accounts

 Double entry system owes its origin to an Italian merchant name Luco Pacioli who wrote the first book entitled ‘De computis et Scripturis’ on double entry accounting in the year 1494 we have seen earlier

that in Double entry system of accounting or Bookkeeping that Every business transaction has two aspects, i.e., when we receive something, we give something else in return. For example, when we purchase goods for cash, we received goods and give cash in return similarly in a credit good, goods are given to the customer and the customer becomes debtor for the amount of goods sold to him This method of writing every transaction in two accounts is known as Double Entry System of Accounting. Of the two accounts, one account is given debit while the other account is given credit with an equal amount. Thus on any date, the total of all debits must be equal to the total of all credits because every debit has corresponding credit. 

The factor common in double entry system 

To have a clear understanding of the double entry system, it is necessary to keep in mind the following factors which are common to every business :

• The business has to enter into business dealings with a number of persons or firms. Therefore, to keep a record of each asset of the business an account of each person or firm, with whom the business has business dealings, is opened. Such accounts are known as a personal account
• The business must necessarily have some assets such as stock, cash, furniture, etc. with the help of which the business may be carried on. Therefore, an account of each asset in the business is opened for keeping a record of each asset of the business. Such accounts are classified as real or property accounts. 
• There must be certain sources from which the income of the business is derived. Similarly, certain expenses are incurred to earn income. Therefore an account of each expense and income is opened in the books for ascertaining profit and loss of the business for a particular period. Such accounts are known as Nominal Account.

[ Also Like: The Meaning of Accounting Equations]

 

The Meaning of Accounting Equation

The Meaning of Accounting Equation The whole of financial accounting is based on the accounting equation. For a firm to operate resources are required and these resources are supplied to the firm by

someone. The resources possessed by the firm are known as assets and obviously, some of the resources will have to be supplied to the firm by the owner of the business. The total amount supplied by him is known as his capital. If he was the only one who had supplied the assets them capital must equal assets. On the other hand, some of the assets will normally have been provided by someone other than the owner. The indebtness of the firm for these resources is known as liabilities. The capital must be equal to assets minus liabilities. Two sides of the equation are, therefore, equal. On the one side are the resources possessed and on the other side are the sources from which these resources were obtained. The equity of the two sides will always be true, no matter how many transactions are entered into. The actual assets, capital, and liabilities may change but the equality of the assets with that of the total of capital and liabilities will always hold true. Capital is often called the owner’s equity or net worth.

 Accounting Equation

American accountants have derived the rules of debit and credit through accounting equation which is given below:-

Assets  =  Equities

The equation is based on the principle that accounting deals with property and rights to property and the sum of the properties owned is equal to the sum of the rights to the properties. The properties owned by a business are called assets and the rights to be properties are known as liabilities or equities of the business. Equities may be divided into equities of creditors representing debts of the business known as liabilities and equity of the owner known as capital. Keeping in view the two types of equities the equation given above can be stated as below:-

 Assets =  Liabilities + Capital

Or

Capital =  Assets – Liabilities

Or

Liabilities = Assets – Capital

 [ Also Like Financial statements are prepared primarily ]

Role of Accounting Equation

•  Regarding Assets: Increases in  assets are debits and decreases in assets are credits
• Regarding Liabilities: Increases in liabilities are credits and decreases in liabilities are debits
• Regarding Capital; Increases in the capital are credits and decreases in the capital are debits
• Regarding Expenses: Increases in expenses are debits and decreases in expenses are credits
• Regarding Incomes or Profit: Increases in incomes or profits are credits and decreases in income or profits are debits.

 

Financial Statements are Prepared Primarily in Accounting

Financial statements are prepared primarily for decision making. They play a dominant role in setting the framework of managerial decisions. But the information provided in the financial statement is not an end in itself as no meaningful conclusions can be drawn from these statements alone. However, the information provided in the financial statements is of immense use in making decisions through analysis and interpretation of financial statements. Financial analysis is the process of identifying the financial strengths and weaknesses of the firm by properly establishing a relationship between items of the balance sheet and profit and loss account.

The term financial analysis is also known as analysis and interpretation of financial statements, refers to

the process of determining the financial strength and weaknesses of the firm by establishing a strategic relationship between the items of the balance sheet, profit and loss, and other operative data. The purpose of financial analysis is to diagnose the information contained in financial statements so as to judge the profitability and financial soundness of the firm. Just like a doctor examines his patient by recording his body temperature, blood pressure, etc. before making his conclusion regarding the illness and before giving his treatment, a financial analyst analysis the financial statements with various tools of analysis before commenting upon the financial health or weaknesses of an enterprise. The analysis and interpretation of financial statements are important to bring out the mystery behind the figures in financial statements. Financial statement analysis is an attempt to determine the significance and meaning of the financial statement data so that forecast may be made of the future earnings, ability to pay interest and debt maturities, and profitability of a sound dividend policy. The term financial statement includes both analysis and interpretation. A distinction should therefore be made between two terms. While the term analysis is used to mean the simplification of financial data by methodical classification of the data given in the financial statements, interpretation means explaining the meaning and significance of the data so simplified. However, both analysis and interpretation are interlinked and complementary to each other.

What is The Money Market

What is the money market, The Money market is that segment of the financial market which refers to all transaction in near money such as short term claims on financial intermediaries, agriculture, consumers cooperate sector it may be defined as the center for dealing in monetary assets? It meets the short term requirement of borrowers and provides liquidity or cash to the lenders in this market short term surplus funds at the disposal of financial and other institutions and individual and also by the government It provides a mechanism for the quick and dependable transfer of short term funds In simple words, it is that market wherein money or claims on money is borrowed and loaned for short term funds in simple words it is that market wherein money claims on money is borrowed and loaned for a short period of time. So the money market is a center in which financial institutions congregate for the purpose of dealing impersonally in the monetary assets. Thus we may call the money market a reservoir of short-term funds refer to relatively liquid assets i.e. which can be converted into cash without much loss An asset is termed as the short term which has a maturity period of one year or less. Transaction on money market may be for a period of even one day or fifteen days a month and so on but less than one years i.e. 365 days 

Money markets may serve a particular region 

Money markets may have no geographical constraints but many such markets may serve a particular region This region may be one part of a country or have an international shade. Like New York is an international money market whereas New Delhi is a regional Indian money market There may be various centers of money market, these may not be a separate independent market but are interlinked and related.

The price for financial asset traded on this market is referred to as the interest rate paid 

The price for financial asset traded on this market is referred to as the interest rate paid for the specific period The central bank occupies a strategic position in the money market especially when the money market is not the international level it is the money market through which the central bank comes in contact with the financial sector of the economy as a whole and it is by varying the liquidity in the market and thereby influencing the cost and availability of credit.  

Mutual Funds For Whom Who Do Not Knowledge at Stock Market

 Mutual funds for whom

 Mutual funds can survive and thrive only if they can live up to the hopes and trust of their individual members these hopes and trust echo the peculiarities which support the emergence and growth of such institutions irrespective of the nature of economy where these are to operate Mutual funds come to the rescue of those people who do not excel at stock market due to certain mistakes they commit which can be minimized with mutual funds such mistake can be viz. lack of sound investment strategies, unreasonable expectations of making money, untimely decisions of investment and disinvestment, acting on advice given by others, putting all their eggs in one basket i.e. failure to diversity Mutual funds come to the rescue of such investors who face followings problems while making direct investments

 

• Limited resources in the hands of investors quite often take them away from stock market transactions
• Lack of funds forbids investors to have a balanced and diversified portfolio
• Lack of professional knowledge associated with investments business enables investors to operate gainfully in the market Small investors can hardly afford to have expensive investment consultations
• To buy shares, investors have to engage share brokers who are the members of the stock exchange and have to pay their brokerage
• They hardly have access to price sensitive information in time
• It is difficult for him to know the developments taking place in share market and corporate sector
• Firm allotments are not possible for small investors when there is a trend of over subscription to public issues

Is Factoring is Fund Based Financial Service

 What is factoring, factoring is a fund based financial service predicated on the receivables of a firm. Factoring may be defined as a continuing legal relationship between the financial institution and a business concern selling goods or providing services to trade customers on open account basis whereby the factor purchases the clients book debits either with or without recourse to the client and in relation thereto control the credit extended to the customer and administer the sale ledger 

It is apparent from this statement that credit factoring is concerned with debts from the traders as opposed to customers. Thus in factoring between the two parties to sale another party enters to facilitate financial transactions. This party is a factor. The term factor has its own origin in the Latin word ‘facere’ meaning to make or to do. He acts as an agent between a supplier and the customer for performing a variety of financing services including credit management. The factor purchases the book debts of suppliers consequently tied up funds in book debt are released to increase the liquidity of the supplier. Technically the book debts are assigned to the factor and it is he who collects them on maturity dates. Factoring is termed as fund-based financial service since normally factor makes a part payment maybe 90 percent immediately after the debts are purchased. For this service, he charges interest which is above the market prevailing rate. By virtue of this facility dependence on banks for working capital is reduced especially in cases of expanding sales. Besides the collection of the debts purchased and arranging the payment against such purchased debts factor provides few other services which are:

• Administration of seller’s sales ledger

• Covering the credit risk involved 

• Advisory services he gets service charges over and  above the discount or rebate for the debts collected by him

The term financial institution may call as The Factor the business concern is client. The trade customers are the consumers the clients book debts means accounts receivables.