Today we are living in a language arena. We have a language all around us. Be it a human life or an animal life, tech life or a social life language is everywhere. JAVA, C++, Ruby on Rails are well known as a language of computers.
The business world also needs a language to communicate. it presents the picture of its operations, it’s financial position and other important matters. ERP Softwares like Tally.ERP 9 is just an extended computerised edition of the business languages
Wiki defines it accountancy as a language of business.
So learning accounting is like the learning the language of business. Recently I did a quick survey through email and ask my readers a simple question.
[highlight]” Doest it possible for someone to learn Accounting without a commercial background”? [/highlight]
Most of my readers replied me that yes it is possible. My readers also told me that a person needs to understand Accounting principles . So if we know the Basic Accounting Rules, we can learn any language. Once we understand the accounting principles, it becomes easy to pass voucher Entry in Tally.ERP 9 in Tally.ERP 9
Learning accounts helps in getting a good job. People can do freelance work and can earn from accounting. It doesn’t need much education or any special skill. Let me share with you about one of my friends. My friend Arjun’s financial position was very weak. He was the only bread earner in his family. He started to write books of accounts at the age of 16. He started to work as an independent freelancer accountant at the age of 18. Within 5 years his portfolio increase to 30 customers and at the age of 34 he bought his own first flat. It’s all just from the accounting career.
Yes, you too can do it and I am here to help you.
Many people ask me what is the easiest way to learn accounts?
After spending 20+ years in the field of real accounts , I can define the path of a successful accounting career as below:
- 1. Know the Basic Rules of Accounting.
- 2. Know the 3 main account types.
- 3. Go through a lot of practical real examples and apply both the rules as mentioned as above.
Let’s explore the above process in more details.
An example is the best way to explain anything so let’s take a real example.
Suppose I am writing books of accounts for ABC Company.
ABC company runs its business of selling furniture and fixtures.
From April 1st to April 5th it has incurred following financial transactions:
1. Opened a current bank account with HDFC Bank with an initial cash deposit of Rs. 10,000.
2.The Company purchased a table and furniture worth of Rs. 7500. Supplier name is “Nilkamal Furniture Mart” invoice number 50 and date is 4th April 2015. Furniture was purchased for sitting arrangement. The Company issued a PDC Dated 10th April 2015 for full and final payable amount.
So, how you will pass above entry without using an accounting software ? If you can pass these entries in a piece of paper or in a Microsoft word or in excel, you will be able to manage any ERP solutions on your own. So the most important things to learn accounts is the learning basic accountancy by familiarising through the accounting principles
Now let me explain few things.
When we write the books of accounts for a company, we can not create a ledger account for our own company. For e.g. here we are writing books of account for ABC company so there can’t be a ledger of ABC company itself in it’s own books of accounts.
Now analyses the transactions one by one.
in the first transactions, Company is opening a bank account with HDFC bank. So we need to find out the types of accounts involves in this transactions. Here one Individual account type and another Goods or Assets account type is involves. The Individual account is the HDFC Bank and Assets account is Cash Account. We will see later how to find out the account type.
In 2nd transaction there is one individual account type is involves. Nilkamal Furniture is a name of a 3rd party and it belongs to Individual account type.
Another account type involves is Goods Account.
So to pass an accounting entry first we need to find out the type of accounts involves. Now the question will flush in mind how many types of accounts are there? Let’s explore the type of accounts.
[box type=”info” icon=”info”]Types of Accounts[/box]
We can categorise all the accounts into 3 main types of accounts.
01) Individual or personal Accounts
All living human beings are belongs to these account type category. Corporate body or partnership firm, corporation or statutory organisations also belongs to this category.
02)Goods and Assets Accounts
In business the most common word is Goods. Goods in a business meant the item for which the business is set up.
03) Expenses or Losses and Income or Profit Accounts.
Whatever expenses we do in business are comes under this category. Income accounts, profit accounts and loss accounts also falls under this category.
Now, we have some idea of types of accounts and we have seen the type of accounts in our example. The next step is to apply debit and credit Rules which is the core rule of Accounts.
In accounts, there are 3 Thumb rules of basic accountancy to learn accounts. It also called the accounting principles. Debit and Credit in Accounts depends on the types of accounts involves in a transaction.
01. Debit the receiver OR credit the giver (Applicable for Individual Account Type )
02. Debit what comes in OR Credit what Goes out (Applicable for Goods and or Assets Account Type)
03. Debit expenses and losses OR credit income and PROFIT
(Applicable for Expenses or Losses and Incomes or Profit Account Type)
So, what does it means ? Let we explore
Suppose in a transaction, when an individual account type is involved then you need to find out who is given and who is a receiver.
In our first example as we have seen one Individual account type is the HDFC Bank Ltd. In the transactions, HDFC bank is the receiver so as per the rule, Debit the receiver.
Here you may ask that we are giver so why our account can’t be credited . As explained you earlier that in our books of account we can’t create our own ledger.
Now in the same transactions, there is one more account type involves as mentioned above. It is the Goods or Assets Accounts. Cash belongs to Assets accounts and Cash is going out so we need to credit Cash Account.
So, in account books the 1st transactions will be recorded as :
Dr. HDFC Bank Ltd Rs. 10,000 (Because HDFC bank is a receiver)
Cr Cash Account Rs. 10,000 (because cash is going out)
Narration : Being initial cash deposited into HDFC bank Ltd to open a new current account.
2) Now let’s see the 2nd transactions and apply the same rules.
in 2nd transactions, the Individual account type is the Nilkamal Furniture mart. rule belongs to Individual account type is debit the receiver and credit the giver. Here Nilkamal Furniture mart is giving us the furniture so we will credit his account.
The other account type involves is the Goods/Assets accounts so as per the rule belong to Goods/Assets account furniture is coming in so debit the furniture account
Dr. Furniture Account Rs. 7500
Cr. Nilkamal Furniture Rs. 7500
Narration : Being furniture purchased vide invoice number 50.
We have completed our first example and passed accounting entries following the accounting principles.
Let me explain you here the third type of account and rules related to it.
03) Income and expenses Accounts
Any expenses you incur in running the day-to-day business transactions is accounted as expenses. During the course of business activities, firm earns income also.
The rule related to the 3rd type of account is :
Debit Expenses or losses and Credit Income or Profit.
Suppose there is an expense of petrol then Petrol expenses is debited in accounts.
Let’s summarise the above rules once again with the related types of accounts :
1) For Individual Accounts Debit the receiver and Credit the giver
[2) For Goods and Assets Accounts Debit what comes IN and Credit what goes OUT
3) For Income and Expenses or profit and Loss Accounts Debit expenses or losses and credit income or profit
So, once you understand the 3 account types and apply rules related to its account type, you have almost done accounting.
Remember there is no 4th type of accounts so all accounting transactions will have only any 2 out of these 3 account types. Also, no 4th rules in Accounts out of the above 3 rules.
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