Accounts and its types
The accounting system uses Accounts to keep track of information. Here is a simple way to understand what accounts are. In your office, you usually keep a filing cabinet. In this filing cabinet, you have multiple file folders. Each file folder gives information for a specific topic only. For example you may have a file for utility bills, phone bills, employee wages, bank deposits, bank loans etc.
A chart of accounts is like a filing cabinet. Each account in this chart is like a file folder. Accounts keep track of money spent, earned, owned, or owed. Each account keeps track of a specific topic only. For example, the money in your bank or the checking account would be recorded in an account called Cash in Bank. The value of your office furniture would be stored in another account. Likewise, the amount you borrowed from a bank would be stored in a separate account.
Each account has a balance representing the value of the item as an amount of money. Accounts are divided into several categories like Assets, Liabilities, Income, and Expense accounts. A successful business will generally have more assets than liabilities. Income and Expense accounts keep track of where your money comes from and on what you spend it. This helps make sure you always have more assets than liabilities.
In order to track money within an organization, different types of accounting categories exist. These categories are used to denote if the money is owned or owed by the organization. Let us discuss the three main categories: Assets, Liabilities, and Capital.
An Asset is a property of value owned by a business. Physical objects and intangible rights such as money, accounts receivable, merchandise, machinery, buildings, and inventories for sale are common examples of business assets as they have economic value for the owner. Accounts receivable is an unwritten promise by a client to pay later for goods sold or services rendered.
A Liability is a legal obligation of a business to pay a debt. Debt can be paid with money, goods, or services, but is usually paid in cash. The most common liabilities are notes payable and accounts payable. Accounts payable is an unwritten promise to pay suppliers or lenders specified sums of money at a definite future date.
Capital, also called net worth, is essentially what is yours – what would be left over if you paid off everyone the company owes money to. If there are no business liabilities, the Capital, Net Worth, or Owner Equity is equal to the total amount of the Assets of the business.
Accounts and its types
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