Accounting Equation – Kinds of Accounts – Personal – Real - Nominal

This is the most important topic and the whole Accounting is based on this equation as all the financial statements follow this accounting equation and this accounting equation includes all the five types of accounts used in accounting. These Accounts are:

    ü  Assets

    ü  Liabilities

    ü  Owner's Equity

    ü  Income

    ü  Expenses

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What Do You Mean By Accounting Equation?

Accounting Equation or Basic Accounting Equation or Fundamental Accounting Equation or Accounting Formula Sheet tells us that all the assets owned by the business are always equal to the sum of liabilities and Owner's Equity or in other words it shows us the fundamental relationship exists between Assets, Liabilities And Equity.

Numerically, we can write Accounting Equation Formula as shown below:

Assets = Liabilities + Owner's Equity

Assets are resources of the business and Liabilities are the outside sources of these assets. While Owner's Equity is the internal sources of these assets. This equation should remain in balance throughout the accounting period, otherwise, our accounting records will not remain correct and does not show true position of the business.

Basically, there are two Rights against the Assets of the Entrepreneur that is Called Equity.

1. Right of the the Outsiders or Accounts Payable or Creditors Against The Assets of Business.

2. Rights of the Owners Against The Assets of the Entrepreneur's Business.

The Financial Position is represented by accounting equation or in other words Balance Sheet is shown through accounting Equation.

All the revenues increase the Owner's Equity because revenues are the profits for the business and it is earned by the owner.  All the expenses decrease the Owner's Equity because expenses have to be borne by the proprietor.

Assets Minus Liabilities Equals?

If we rewrite accounting equation, then we get Shareholder's Equity Or Equity (in case of company or corporation) or Owner's Equity (in case of Sole Proprietorship or Partnership) and it is also called Owner's Equity Equation or Shareholder's Equity Equation as shown below:

Assets - Liabilities = Owner's Equity or Equity or Shareholder's Equity

Assets Minus Equity Equals?

Similarly, if we rewrite it again, then we get Liabilities and it is known as Liabilities Equation as shown below:

Liabilities  = Assets - Owner's Equity

Analysis of Transactions

Analysis of transactions means how much accounts are involved in the Business Transactions and which account is to be debited and which is to be credited.

There are five types / kinds of Accounts involved in any transaction. In fact, the whole accounting is rounded about these five types of accounts:

    ü  Assets

    ü  Liabilities

    ü  Income

    ü  Expenses

    ü  Owner’s Equity

Rules For Debiting and Crediting Accounts

Assets

Increase in Assets = Debit

Decrease in Assets= Credit

Liabilities

Increase in Liabilities = Credit

Decrease in Liabilities= Debit

Income

Increase in Income = Credit

Decrease in Income= Debit

Expense

Increase in Expense = Debit

Decrease in Expense = Credit

Owner’s Equity

Increase in Owner’s Equity = Credit

Decrease in Owner’s Equity = Debit

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Classification of Ledger Accounts

What is Account?

Account is a summarized and classified record of all business transactions relating to a person or thing. For Example, Sales Account, Mr. A’s Account, Purchases Account, etc.

There are two main types of accounts:

1. Personal

These accounts are related to a person. 

Note: The Company is an artificial person created by law.

2. Impersonal

Accounts that are not related to a person.

Personal Accounts can be further divided into following forms:

(i)  Natural Person

Accounts that are related to a living person. For Example Mr. A Account. Rashid’s Account, etc.

(ii) Artificial Person

Accounts that are related to non-living person. For Example, ABC Limited, National Bank L.t.d.etc.

(iii) Representative Accounts

Some accounts represent certain persons or group of persons. For Example, all the salaries which are paid to the employees for the services rendered by them is represented by “Outstanding Salaries Account”, relating to all employs.

 Impersonal Accounts can be further divided into following forms:

(i)  Real or Property Accounts

Accounts relating to either those things owned by the business, i.e., Assets or liabilities. For Example, Furniture Account, Plant & Machinery Account, Buildings Account, Cash Account, Account Receivable Account, Accounts Payable, Loans, etc. Real accounts are Permanent Accounts as these are transferred to balance sheet.

(ii) Nominal or Proprietary Accounts

Accounts that are related to expenses, incomes, gains and losses. For Example, Salaries Expense Account, Discount Received Account, Discount Allowed Account, Rent Expense Account etc. These accounts are Temporary Accounts as these are closed to Income Statement at the end of the accounting period.