Types of Accounts

VOUCHER:

It is a written instrument that serves to confirm or witness (vouch) for some fact such as a transaction.  Commonly, a voucher is a document that shows goods have bought or services have been rendered, authorizes payment, and indicates the ledger accounts in which these transactions have to be recorded.

Types of Voucher: Normally the following types of vouchers are used. i.e

1.       Receipts voucher

2.       Payment voucher

3.       Non-cash or Transfer Voucher

4.       Supporting Voucher

Receipt Voucher:-

Receipt voucher is used to record cash or bank receipt.  Receipt vouchers are of two types. i.e.

a.       Cash receipt voucher –it denotes receipt of cash

b.      Bank Receipt voucher- it indicates receipt of cheque or demand draft.

Payment Voucher

Payment voucher is used to record a payment of cash or cheque.  Payment vouchers are of two types. i.e.

a.       Cash payment voucher- it denotes payment of cash

b.      Bank payment voucher- it indicates payment by cheque or demand draft

Non-Cash or Transfer Voucher

These vouchers are used for non-cash transactions as documentary evidence. E.g., goods sent on credit.

Supporting vouchers

These vouchers are the documentary evidence of transactions that have happened.

Source Documents

Vouchers are the documentary evidence of the transactions so happened.  Source documents are the basis on which transaction are recorded in subsidiary books i.e. source documents are the evidence and proof of transactions.

Name of the Book	Source Document
a.       Cash book	Cash Memos, Cash receipts and issue vouchers
b.      Purchase books	Inward invoice received from the creditors of goods
c.       Sales book	Outward invoice issued to Debtors
d.      Return inward Book	Credit note issued to debtors and Debit note received from Debtors
e.      Return outward book	Debit note issued to creditor and credit note received from creditors.

 The concepts of ‘Account’, ‘Debit’ and ‘Credit’

An ‘Account’ is defined as a summarized record of transactions related to a person or a thing. E.g.when the business deals with customers and suppliers, each of the customers and suppliers will be a separate account.  We must know that each one of us is identified as a separate account by the bank when we open an account with them.  The account is also related to things – both tangible and intangible. E.g. land, building, equipment, brand value, trademarks etc. are some of the things.  When a business transaction happens, one has to identify the ‘account’ that will be affected by it and then apply the rules to decide the accounting treatment.

Typically, an account is expressed as a statement in form of English letter ‘T’.  it has two sides.  The left hand side is called as “debit” side and right hand side is called as “credit” side.  The debit is connoted as ‘Dr’ and the credit by ‘Cr’.  The convention is to write the Dr and Cr labels on both sides as shown below.

Each side of the account will show effects, so that one can easily take totals of both sides and find out the difference between the two.  Such difference in the two sides of an account is called ‘balance’.  If the total of debit side is more than the credit side, the balance is called as debit balance and if the total of credit side is more than the debit side, the balance is called as ‘credit balance’.  If the debit and credit sides are equal, the account will show ‘nil balance’.

The balances are to be computed at the end of an accounting period.  These balances are then considered for preparation of income statement and balance sheet.  Let us see the example.

Dr.                                                                  Cash Account                                                                                   Cr.

Particulars	Amount	Particulars	Amount
Cash brought into business Received for goods sold	1,00,000     25,000	Paid for goods purchased Paid for rent Balance at the end	50,000   15,000   60,000
	1,25,000		1,25,000

It can be seen from the above example that the debit side of cash account shows the receipt of cash into the business and the credit side reflects the cash that has gone out of the business.

 

TYPES OF ACCOUNTS

While doing business transactions that may be large in number and complex in nature, one may come across numerous accounts that are affected.  How does one decide about accounting treatment for each of them? If common rules are to be applied to similar type of accounts, there must be a way to classify the account on the basis of their common characteristics.

Let us see what each type of account means.

1.       Personal Account: As the name suggests these accounts related to persons.

a.       These persons could be natural persons like suresh’s A/c, Anil’s A/c, Rani’s A/c etc.

b.      The persons could also be artificial persons like companies, bodies corporate or association of persons or partnerships etc. Accordingly, we could have Videocon industries A/c, Infosys Technologies A/c, Charitable Trust A/c, Ali and Sons trading A/c , ABC Bank A/c. etc.

c.       There could be representative personal accounts as well.  Although the individual identity of persons related to these is known, the convention is to reflect them as collective accounts. E.g. when salary is payable to employees, we know how much is payable to each of them, but collectively the account is called as ‘Salary Payable A/c’.  Similar examples are rent payable, insurance prepaid, commission pre-received etc.

2.       Real Accounts: These accounts are related to assets or properties or possessions, they are further classified as follows.

a.       Tangible Real Account: Assets that have physical existence and can be seen, and touched. E.g. Machinery A/c, Stock A/c, Cash A/c, Vehicle A/c, and the like.

b.      Intangible Real Account:- These represent possession of properties that have no physical existence but can be measured in terms of money and have value attached to them. e.g. Goodwill A/c, Trade mark A/c, Patents & Copy rights A/c, Intellectual Property rights A/c and etc.

3.       Nominal Account:- These accounts are related to expenses or losses and incomes or gains e.g. Salary and Wages A/c, Rent of Rates A/c, Travelling Expenses A/c, Commission received A/c, Loss by the fire A/c etc.

THE ACCOUNTING PROCESS

There are two approaches for deciding when to write on the debit side of an account and when to write on the credit side of an account.

A.      American approach / Modern Approach

B.      British Approach /Traditional Approach / Double Entry System.

AMERICAN APPROACH: In order to understand the rules of debit and credit according to this approach transactions are divided into the following five categories.

1.       Transactions relating to owner, e.g., Capital – These are personal accounts

2.       Transactions relating to other liabilities, e.g., suppliers of goods – these are mostly personal accounts.

3.       Transactions relating to assets, e.g., land, building, cash, bank, stock-in-trade, bills receivable – these are basically all real accounts.

4.       Transactions relating to expenses, e.g., rent, salary, commission, wages, and cartage – These are nominal accounts.

5.       Transactions relating to revenues, e.g., interest received, dividend received, sale of goods – these are nominal accounts.

The rules of debit and credit in relating to these accounts are stated as under:

1.       For Capital Account:

Debit means decrease

Credit means increase

2.       For any Liability Account:

Debit means decrease

Credit means increase

3.       For any Asset Account:

Debit means increase

Credit means decrease

4.       For any Expense Account:

Debit means increase

Credit means decrease

5.       For any Revenue Account:

Debit means decrease

Credit means increase