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Types of Accounting

There are several types of accounting that range from auditing to the
preparation of tax returns. Accountants tend to specialize in one of these
fields, which leads to the different career tracks noted below:

Financial accounting. This field is concerned with the aggregation of


financial information into external reports. Financial accounting requires
detailed knowledge of the accounting framework used by the reader of a
company's financial statements, such as Generally Accepted Accounting
Principles (GAAP) or International Financial Reporting Standards (IFRS). Or, if
a company is publicly-held, it requires a knowledge of the standards issued
by the government entity responsible for public company reporting in a
specific country (such as the Securities and Exchange Commission in the
United States). There are several career tracks involved in financial
accounting. There is a specialty in external reporting, which usually involves
a detailed knowledge of accounting standards. There is also the controller
track, which requires a combined knowledge of financial and management
accounting.
Public accounting. This field investigates the financial statements and
supporting accounting systems of client companies, to provide assurance
that the financial statements assembled by clients fairly present their
financial results and position. This field requires excellent knowledge of the
relevant accounting framework, as well as an inquiring personality that can
delve into client systems as needed. The career track here is to progress
through various audit staff positions to become an audit partner.
Government accounting. This field uses a unique accounting framework to
create and manage funds, from which cash is disbursed to pay for a number
of expenditures related to the provision of services by a government entity.
Government accounting requires such a different skill set that accountants
tend to specialize entirely within this area for their entire careers.
Forensic accounting. This field involves the reconstruction of financial
information when a complete set of financial records is not available. This
skill set can be used to reconstruct the records of a destroyed business, to
reconstruct fraudulent records, to convert cash-basis accounting records to
accrual basis, and so forth. This career tends to attract auditors. It is usually
a consulting position, since few businesses require the services of a full-time

forensic accountant. Those in this field are more likely to be involved in the
insurance industry, legal support, or within a specialty practice of an audit
firm.
Management accounting. This field is concerned with the process of
accumulating accounting information for internal operational reporting. It
includes such areas as cost accounting and target costing. A career track in
this area can eventually lead to the controller position, or can diverge into a
number of specialty positions, such as cost accountant, billing clerk,
payables clerk, and payroll clerk.
Tax accounting. This field is concerned with the proper compliance with
tax regulations, tax filings, and tax planning to reduce a company's tax
burden in the future. There are multiple tax specialties, tracking toward the
tax manager position.
Internal auditing. This field is concerned with the examination of a
company's systems and transactions to spot control weaknesses, fraud,
waste, and mismanagement, and the reporting of these findings to
management. The career track progresses from various internal auditor
positions to the manager of internal audit. There are specialties available,
such as the information systems auditor and the environmental auditor.

Three Types of Accounts


Real, Personal and Nominal Accounts

There are mainly three type of accounts in accounting: Real, Personal and
Nominal accounts, personal accounts are classified under three
subcategories: Artificial, Natural and Representative. If you fail to identify an
account correctly as either a real, personal or nominal, in most cases, you
will get the journal entries incorrect.

1. Real Accounts

All assets of a firm, which are tangible or intangible, fall under the category
Real Accounts.

Tangible real accounts are related to things that can be touched and felt
physically. A few examples of tangible real accounts are building, machinery,
stock, land, etc.

Intangible real accounts are related to things that cant be touched and felt
physically. A few examples of such real accounts are goodwill, patents,
trademarks, etc.

Golden rule for real accounts


Debit what comes in
Credit what goes out

Example

The transaction below shows the interaction of two different real accounts:
one is furniture and the other is cash, both of them are assets of the
company and hence classified as real accounts.

Purchased furniture for 10,000 in cash

Accounts Involved
Furniture A/C
To Cash A/C

Debit/Credit

Rule Applied

Debit

Furniture is real a/c so Dr. What comes in

Credit

Cash is a real a/c so Cr. What goes out

*Amount will be 10,000 in both debit and credit.

2. Personal Accounts

These accounts are related to individuals, firms, companies, etc. A few


examples of personal accounts include debtors, creditors, banks,
outstanding/prepaid accounts, accounts of credit customers, accounts of
goods suppliers, capital, drawings, etc.

Natural personal accounts: This type of personal accounts is the simplest to


understand out of all and includes all gods creations who have the ability to
deal, who, in most cases, are people. E.g. Kumars A/C, Adams A/C, etc.

Artificial personal accounts: Personal accounts which are created artificially


by law, such as corporate bodies and institutions, are called Artificial
personal accounts. E.g. Pvt Ltd companies, LLCs, LLPs, clubs, schools, etc.

Representative personal accounts: Accounts which represent a certain


person or a group directly or indirectly. E.g. Lets say that wages are paid in
advance to an employee a wage prepaid account will be opened in the
books of accounts. This wages prepaid account is a representative personal
account indirectly linked to the person.

Golden rule for personal accounts


Debit the receiver
Credit the giver

Example

The transaction below demonstrates the interaction between two different


personal accounts, one of which is a private limited company and the other
one is a bank.

Paid Unreal Pvt Ltd. 24,000 by check

Accounts Involved

Debit/Credit

Unreal Pvt Ltd. A/C

Debit

To Bank A/C

Credit

Rule Applied

Artificial personal so a/c Dr. the receiver


Artificial personal so a/c Cr the giver

*Amount will be 24,000 in both debit and credit.

3. Nominal Accounts

Accounts which are related to expenses, losses, incomes or gains are called
Nominal accounts. The dictionary meaning of the word nominal is existing
in name only and the meaning remains absolutely true in accounting sense
too, because nominal accounts do not really exist in physical form, but
behind every nominal account money is involved. E.g. Purchase A/C, Salary
A/C, Sales A/C, Commission received A/C, etc.

The final result of all nominal accounts is either profit or loss which is then
transferred to the capital account.

Golden rule for nominal accounts


Debit all expenses & losses
Credit all incomes & gains

Example

The following example shows a transaction where a nominal account deals


with a real a/c.

Purchased good for 15,000 in cash

Accounts Involved

Debit/Credit

Purchase A/C

Debit

To Cash A/C

Credit

Rule Applied

Nominal A/C so Dr. all expenses


Real A/C so Cr what goes out

Amount will be 15,000 in both debit and credit.

Journal
In accounting and bookkeeping, a journal is a record of financial transactions
in order by date. A journal is often defined as the book of original entry. The
definition was more appropriate when transactions were written in a journal
prior to manually posting them to the accounts in the general ledger or
subsidiary ledger. Manual systems usually had a variety of journals such as a
sales journal, purchases journal, cash receipts journal, cash disbursements
journal, and a general journal.

With today's computerized bookkeeping and accounting, it is likely to find


only a general journal in which adjusting entries and unique financial
transactions are entered. The recording and posting of most transactions will
occur automatically when sales and vendor invoice information is entered,
checks are written, etc. In other words, accounting software has eliminated
the need to first record routine transactions into a journal.

Ledger
A ledger is the principal book or computer file for recording and totaling
economic transactions measured in terms of a monetary unit of account by
account type, with debits and credits in separate columns and a beginning
monetary balance and ending monetary balance for each account.

Balance Sheet
A balance sheet is a financial statement that summarizes a company's
assets, liabilities and shareholders' equity at a specific point in time. These
three balance sheet segments give investors an idea as to what the
company owns and owes, as well as the amount invested by shareholders.

The balance sheet adheres to the following formula:

Assets = Liabilities + Shareholders' Equity

Income Statement
An income statement is a financial statement that reports a company's
financial performance over a specific accounting period. Financial
performance is assessed by giving a summary of how the business incurs its
revenues and expenses through both operating and non-operating activities.
It also shows the net profit or loss incurred over a specific accounting period.

Cash Flow Statement


The cash flow statement (CFS), a mandatory part of a company's financial
reports since 1987, records the amounts of cash and cash equivalents
entering and leaving a company. The CFS allows investors to understand how
a company's operations are running, where its money is coming from, and
how it is being spent. Here you will learn how the CFS is structured and how
to use it as part of your analysis of a company.

S.E Statement
A financial statement that shows all of the changes to the various
stockholders' equity accounts during the same period(s) as the income
statement and statement of cash flows. It includes the amounts of
comprehensive income not reported on the income statement.

Trial balance
A trial balance is a list of all the general ledger accounts (both revenue and
capital) contained in the ledger of a business. This list will contain the name
of each nominal ledger account and the value of that nominal ledger
balance. Each nominal ledger account will hold either a debit balance or a
credit balance. The debit balance values will be listed in the debit column of
the trial balance and the credit value balance will be listed in the credit
column. The trading profit and loss statement and balance sheet and other
financial reports can then be produced using the ledger accounts listed on
the trial balance.