Accounting is recording, classifying, and summarizing financial statements in a significant way. It helps interpret the results quickly and maintain them for a given time. Any entity requires a proper accounting system regardless of its type and size. It helps evaluate the business operations better and get a clear understanding of the financial condition of the business.
A systematic presentation of the transactions with separate heads of customers and suppliers can help understand its financial condition. It is necessary to maintain a flow in the business, and this is where the business demands an accounting expert to deal with it. An ongoing record log keeps the business operations in hand and helps take it to the next level. It further helps make impactful business decisions, as it reflects the accounts, letting you know how much each person holds in the business.
What are the Different Types of Accounts in Accounting?
There are three major types of accounts that are used in accounting. They are:
Personal accounts are of individuals, firms, companies, and groups of associations. The type of persons to include in this account category are natural, artificial, or representative.
- Representative account – The accounts are representative of other people, which can be an outstanding account, prepaid expensive account, and outstanding wages account. Transactions of the previous or the coming year are included under this account type.
- Artificial accounts –These are mainly accounts of institutions and companies. Such companies are like entities and should have a proper recording in the eyes of the law. Some examples of the account are hospitals, banks, companies, government bodies, partnerships, cooperatives, and the like
- Natural persons – These are accounts of natural persons and are shown as a single account. It can be a capital account, creditors, debtors, and drawing account.
Real accounts are related to possessions, assets, or properties. The properties may or may not have physical existence and are of two types as below:
- Tangible real account – As the name goes, it is the account of a property with physical existence. These assets, such as buildings, vehicles, machinery, and others, can be seen or touched. A real account will not close when a financial year completes. Instead, it carries forward to the next year and appears on the balance sheet
- Intangible real account – The accounts are for possessions or assets that don’t have any physical existence. But these can be measured in monetary terms. Such assets have some value when considered being calculated in the accounts. It is mainly goodwill, trademarks, copyrights, and the like.
The nominal account relates to the expense, loss, income, or gain. It is the account where you can include items like salary, wages, and rent. For other instances, account types are interest account, received a salary, and commission received.
Golden Rules of Accounting to Follow
Before you know about the golden accounting rules, you should have a suitable idea of the debit and credit of accounts. The vitals to keep in mind are:
- Debit the receiver and credit the giver
- Debit comes in, and credit goes out
- Debit includes loss and expenses, whereas credit is about the gains and income
However, let us look at the benefits of the three golden accounting rules in a business.
- Correct Maintenance of Business Records
It is important to have proper maintenance of business records that helps in the company’s success. It will ensure that the company’s financial records are well maintained and recorded systematically.
- Calculate business valuation
When a firm calculates the financial statement, it can help prepare business valuation better. It is better to manage investments and expand the business.
- Compare the financial results
The golden rule helps maintain the financial records, once they are recorded, it helps the business get a clear idea of the financial results of a year, and it is an efficient way to handle the business finances.
- Shows details of legal cases
In case of lawsuits, companies should get quick access to financial records, and this is where the business records are suitable to look for. The golden rules of accounting can help in this relationship.
- Help in proper budgeting and future projections
Having proper accounting practices shows that the business has suitable budget plans. It helps in the foundation growth of an organization. It also helps offer accurate future operations of the business.
- It should comply with standard authorities
Proper accounting can help ensures that it complies with the regulatory authorities. Without the correct accounting disciplines, it can be challenging to maintain regulatory compliance.
- It helps handle tax-related matters
Having updated financial details of a firm helps avoid the shortfalls relating to tax. In case of any improper accounting practice, there can be huge penalties. It often impacts brand value in the market.
With a clear idea of the three golden rules of accounting, you understand the type of transaction and which account it belongs to. This is how you can easily enter financial transaction details and maintain them to be accurate.
The golden rules of accounting help have a futuristic approach towards firms, and accounts can easily use the concept for clear accounting outcomes. It will further help get a suitable monetary approach for maintaining the company’s financial statement. Accountants follow a definite pricing approach that can help easily reflect on the business costings. This is how the accountant can handle the cash inflow and outflow in the best way possible. Knowing the essential aspects of accounting can help in smooth business accounting.