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Principles of Accounting

Accountancy is the art of communicating information of financial nature about a business entity like a sole proprietorship, partnership, company (Pvt. Ltd as well as Ltd) to the owners like sole proprietor, partners and shareholders respectively. The reports or statements contain information about the financial ‘health’ of the concern.

The American Institute of Certified Public Accounts defines Accountancy as the “art of recording classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.”
Generally, all transactions of financial nature have to be recorded. All the transactions are recorded first in the basic books or first books of accounts called the Journal Book. Few examples of journals are (a). Owner invested $10,000 in the company. Now, the journal entry for this transaction would be
_____________________Debit_______Credit
Cash A/c ________________10,000
_________Owner’s equity A/c_____________10,000

The Accounting that we see today, the double-entry system of accounting first emerged in Italy in the 14th century, where traders began to require more capital than a single individual was able to invest. The development of Joint Stock Companies created another need for the concept of accountancy’s scope to include the accounts of Companies.
Each and every transaction in accounting is recorded based on few simple rules which are followed to record transactions. Accounts are classified based on their type. There are three types of accounts. They are (1). Personal Accounts, (2). Real Accounts and (3). Nominal Accounts.
They are called as the “Golden Rules of Accounting”. They are for (1) Personal accounts, debit the receiver, credit the giver, (2) Real Accounts, debit what comes in, credit what goes out and (3) Nominal Accounts, debit all expenses and losses and credit all and incomes.
Let’s see some examples in these accounts.
Personal Accounts example
· Bought stock on credit from Mr.Nicholson worth $15.000
Now the entry would be
___________________Debit_______Credit
Stock A/c______________15,000
________Mr. Nicholson A/c_____________15,000

Nominal Accounts example
· Salaries paid to staff $16,000.
Now the entry would be
________________Debit_______Credit
Salary A/c__________16,000
__________Cash A/c_____________16,000

Real Accounts example
· Bought furniture for the office worth $5,000.
Now the journal entry would be
__________________Debit_________Credit
Cash A/c______________5,000
_________Furniture A/c_______________5,000

Journals are the staring point in accounts of a concern. These journals are then posted into Ledger Accounts. And from these ledgers, individual accounts are prepared. From here on the preparation for the final accounts takes place.

Final accounts are called so because they are prepared when the financial year is coming to an end. The Accounts are closed by preparing final accounts and then brought over balances of last year are carried forward to the next year and the process starts all over again.

References:
http://www.aicpa.org/
http://www.gnucash.org/docs/v1.6/C/t2504.html
http://www.quickmba.com/accounting/fin/double-entry/

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