Account for Yourself

“You are responsible for the good and the bad that is happening in your life”. The one who realises this would excel in his life. Don’t think that I am being philosophical. What I meant was ‘Accounting is the key activity of success in one’s life which is essential to maintain the integrity of his life and his bank balance’. So it essential that everyone has to become accountants for their own accounts, either it may be a bank account or their emotional account. In order to have a glimpse about the basics of accounting I would suggest you to refer the book called “Financial Accounting” written by Reddy Murthy. It would give you the accounting principles in the simplest form. Some of the key terminologies in accounting that you have to know are jotted below. The train to accounting stars here ..

Accounting is a language used for identifying, measuring and communicating economic information for the users. The user may be internal (within the company) or external (outside the company) users.

Asset: Any item of economic value owned by an individual or corporation, especially that which could be converted to cash. Examples are cash, securities, accounts receivable, inventory, office equipment, real estate, a car, and other property. There are two types of assets: Current Assets and Fixed Assets. Current Assets have shorter time span (a year or less) for liquidation whereas Fixed Assets have longer time span (more than a year) in general.

Liability: A liability is a financial obligation, debt, claim, or potential loss. There are two types of liabilities: Current Liabilities and Fixed Liabilities. Current Liabilities have shorter time span (a year or less) for liquidation whereas Fixed Liabilities have longer time span (more than a year) in general.

Debt: An accounting entry which results in either an increase in assets or a decrease in liabilities or net worth.

Credit: An accounting entry which results in either a decrease in assets or an increase in liabilities or net worth.

Debtors: A debtor is simply an entity that owes a debt to someone else, the entity could be an individual, a firm, a government, or an organization. The counterparty of this arrangement is called a creditor.

Creditors: A creditor is a party (e.g. person, organization, company, or government) that has a claim to the services of a second party. The first party, in general, has provided some property or service to the second party under the assumption (usually enforced by contract) that the second party will return an equivalent property or service. The second party is frequently called a debtor or borrower.

Accounting Period: The period for which a business prepares its accounts. Internally, management accounts may be produced monthly or quarterly. Externally, financial accounts are produced for a period of 12 months, although this may vary when a business is set up or ceases or if it changes its accounting year end.

Share: The actual definition of a share is that a share is a share in the share capital of the company.

Profit and Loss Statement: A summary of a corporation's revenues, costs, and expenses within an accounting period--also called an "Income Statement". The balance statement and the profit and loss statement usually reflect a company’s financial condition. Because profits and losses relate to revenue inflows from business operations, a profit and loss statement is an income statement. It is written for a particular accounting period.

Trading Account: That part of an income statement which shows how the gross (operating) profit was generated through the firm's trading activities. Even this is written for a particular accounting period.

Balance Sheet: A balance sheet is a snapshot of a business’ financial condition at a specific moment in time, usually at the close of an accounting period. A balance sheet comprises assets, liabilities, and owners’ or stockholders’ equity. Assets and liabilities are divided into short- and long-term obligations including cash accounts such as checking, money market, or government securities. At any given time, assets must equal liabilities plus owners’ equity. Thus the balance sheet captures the firms total assets and liabilities as on that date.

A Skeleton of a Balance Sheet

GOLDEN RULES OF ACCOUNTING
DEBIT the receiver
CREDIT the giver
DEBIT what comes in
CREDIT what goes out
DEBIT all expenses and losses
CREDIT all incomes and gains

With these basics throw over, let’s go in for the actual structure of Trading and Profit and Loss Account and Balance Sheet of a manufacturing firm as an example.

TRADING and PROFIT & LOSS A/C DEBIT side consists of EXPENSES.
TRADING and PROFIT & LOSS A/C CREDIT side consists of INCOMES.

The above information would have given you a glimpse of what is accounting all about. This base is enough to provide confidence in your mind about accounting. This would ensure you to take any further developments in your accounting knowledge without any hesitation.