MSG Team's other articles

9972 What is Internal Rate of Return (IRR) ?

The Internal Rate of Return (IRR) is another very important metric that can be used to determine whether or not a company must invest its resources in a project. If the company does decide to invest its resources in all the projects then the IRR can help us understand what should be the priority of […]

10716 A Primer on Private Placements

When we think about investment banks, as well as the activities that they undertake, we tend to think about initial public offerings, debt syndication, and other such activities that are very visible to the public eye. However, the reality is that a lot of investments that are routed via investment banks are actually private placements. […]

12704 Challenges of Risk-Based Supervisory System

In the previous articles, we have studied what a risk-based supervisory system for pension funds is. We have also studied the various steps which need to be taken in order to set up such a system. It is true that this system is being adopted on a large scale worldwide because of the various benefits […]

11458 4 Driving Factors for Sustainable Corporate Banking

Commercial or corporate banking has undergone a sea of change in the recent past. All these changes have not been related to technology. Some of the changes have also been related to ideology. The rise of the concept of sustainable corporate banking signifies an ideological shift in the commercial banking industry. Earlier, corporate banking was […]

10775 Concept of Profit Booking and How It Affects Stock Markets

If you have regularly observed the stock market, you may have noticed that a lot of time when the market falls, experts attribute this fall to profit booking. The concept of profit booking is known to a lot of people. However, the knowledge is merely superficial. In this article, we will have a closer look […]

Search with tags

  • No tags available.

The entity concept separates the concerns of the owners from the business. An extension of the same concept is the concept of accounts which splits up the business’s affairs further. The account concept becomes clearer once the double entry system of accounting is explained. That is done at a later stage in the tutorial.

Transactions within the Firm

The firm conducts transactions with outside parties and the accounting system is capable of keeping a track of the same. However there are many transaction that are internal to the firm. For instance when a company undertakes production, it converts raw material into finished products. This transaction is internal to the firm but has a material effect. If the firm were considered as one unit, it would be impossible to account for the transaction as the same party cannot be on both sides of the transaction.

Entity Split Up into Accounts

An appropriate analogy to draw would be that of the human body. The business is the complete entity i.e. the body. Accounts on the other hand are like lungs, kidneys, heart etc. They are like the vital organs that are constituent parts of the entity. They have their own independent existence. However, it is the relationship between these accounts that is of prime importance. That is why it is called the accounting system.

Types of Accounts

All accounts within the organization can be split into three types. An account can be of one and only one of the following type and not more. Here are the various types of accounts.

  • Personal: Personal accounts make most intuitive sense. We keep a track of all the transactions that we have undertaken with a particular person in them. We all maintain personal accounts like the money we owe our friends, the grocer and so on.

  • Real: Real accounts are accounts which have been created to account for tangible things. Accounts such as land and building, machinery a/c etc are called real accounts. Although they are not living beings, we still transact with such entities. Records of such transactions are kept in real accounts.

  • Nominal: Nominal accounts are a special category of accounts. While the other accounts can hold balance and carry it forward, nominal account are automatically reset to zero as soon as the time period is over. Their balance is carried forward to other accounts and the books for that period are closed. Examples of such accounts are Profit a/c, depreciation a/c etc.

Article Written by

MSG Team

An insightful writer passionate about sharing expertise, trends, and tips, dedicated to inspiring and informing readers through engaging and thoughtful content.

Leave a reply

Your email address will not be published. Required fields are marked *

Related Articles

Cash vs. Accrual Basis of Accounting

MSG Team

Objectives of Accounting

MSG Team