Accounting & Golden Rule

What Is Accounting?

Accounting is the process of recording, classifying, summarizing, and interpreting financial transactions of a business.
It helps businesses:

  • Know their financial position
  • Track income and expenses
  • Make informed decisions
  • Comply with legal and tax requirements

In simple words: Accounting is the language of business.

 

Types of Accounts in Accounting?

Accounting uses the Double-Entry System, where every transaction affects two accounts.

There are 5 main types (or categories) of accounts:

 

1 Assets

Assets are resources owned by a business.

Examples:

  • Cash
  • Machinery
  • Buildings
  • Inventory
  • Accounts Receivable

Rule:

  • Debit increases assets
  • Credit decreases assets

 

2 Liabilities

Liabilities are the obligations or debts of a business.

Examples:

  • Loans
  • Accounts Payable
  • Outstanding Expenses
  • Bank Overdraft

Rule:

  • Credit increases liabilities
  • Debit decreases liabilities

 

3 Equity (Capital)

Equity represents the owner’s interest in the business.

Examples:

  • Capital
  • Drawings (withdrawals reduce capital)
  • Retained earnings

Rule:

  • Credit increases equity
  • Debit decreases equity

 

3 Income (Revenue)

Income is what the business earns.

Examples:

  • Sales
  • Service income
  • Interest income

Rule:

  • Credit increases income
  • Debit decreases income

 

4 Expenses

Expenses are costs incurred to run the business.

Examples:

  • Rent
  • Salaries
  • Electricity
  • Stationery
  • Advertising

Rule:

  • Debit increases expenses
  • Credit decreases expenses

Key Functions of Accounting?

  • Records transactions (like sales, purchases, expenses)
  • Classifies them into categories
  • Summarizes them into reports (like balance sheet, income statement)
  • Analyzes financial performance
  • Helps in decision-making
  • Ensures legal compliance (taxes, audits, etc.)

Why Accounting Is Important?

  • Shows profit or loss
  • Helps track business growth
  • Controls expenses
  • Helps attract investors
  • Provides information for planning and budgeting

 

Simple Definition in Accounting?

Accounting is the systematic process of keeping financial records so that a business can understand its financial position and make informed decisions.

Types of Accounting?

1 Financial Accounting

Focuses on preparing financial statements for external users like investors, banks, and government.

Includes:

  • Balance Sheet
  • Income Statement
  • Cash Flow Statement

Purpose: Shows financial performance and position.

2 Management Accounting

Provides financial information to internal users (managers) for decision-making.

Covers:

  • Budgeting
  • Cost control
  • Performance evaluation

Purpose: Helps managers plan and make strategic decisions.

3 Cost Accounting

Deals with calculating the cost of producing goods or services.

Includes:

  • Material cost
  • Labor cost
  • Overheads

Purpose: Helps control costs and set product prices.

4 Tax Accounting

Focuses on preparing and filing tax returns and ensuring tax compliance.

Includes:

  • Income tax
  • GST/VAT
  • Tax planning

Purpose: Follows tax laws and reduces tax liability legally.

5 Auditing

Examines the accuracy of financial records and statements.

Types:

  • Internal audit
  • External audit

Purpose: Ensures financial reliability and prevents fraud

6 Forensic Accounting

Investigates financial fraud, embezzlement, and disputes.

Used by:

  • Police
  • Courts
  • Insurance companies

7 Government Accounting

  • Used in government departments to record public funds, budgets, and expenditures.

8 Project Accounting

  • Used to track the financial progress of specific projects.

Used in:

  • Construction
  • Engineering
  • IT projects

Classification of Accounts

A. Personal Accounts

Accounts related to persons or organizations.

Types of Personal Accounts:

  1. Natural Persons – Humans
    Example: Raj’s Account, Riya’s Account

  2. Artificial Persons – Companies/Institutions
    Example: ABC Ltd., SBI Bank Account

Golden Rule:

Debit the receiver
Credit the giver

B. Real Accounts

Accounts related to assets (tangible or intangible).

Types of Real Accounts:

  • Tangible Assets: Cash, Machinery, Building, Furniture
  • Intangible Assets: Goodwill, Patents, Trademarks

Golden Rule:

Debit what comes in
Credit what goes out

C. Nominal Accounts

Accounts related to expenses, losses, incomes, and gains.

Examples:

  • Expenses: Salary, Rent, Electricity
  • Losses: Bad Debts
  • Incomes: Sales, Commission Received
  • Gains: Profit on Sale of Asset

Golden Rule:

Debit all expenses and losses
Credit all incomes and gains

Real Account Tangible Assets

Real Account Intangible Assets Brands Assets

Personal Account

Nominal Account