Rules of Accounting & Account Types

1. What is an Account?

Definition: An account is a collection of transactions — a place where similar transactions are grouped together.

The most common form is the T-account — made in the shape of a letter T, so it has two sides:

• Left-hand side = Debit (Dr)
• Right-hand side = Credit (Cr)
• The title (name of the account) is written on top — e.g. a debtor, a creditor, cash, bank, any asset or liability account.

Example — Mr X's account (Mr X = our debtor / customer)

A debtor = person/company we sold goods to on credit; we expect the money back. Mr X owed us $1000 at the start.

Selling to a customer ⇒ debit his account. Customer returns goods / pays us ⇒ credit his account.

Balancing a T-account (end of month / period)

All T-accounts are balanced at the end of the period. Steps:

2. Three-Column / Running Balance Account

Definition: An alternate form of an account with three columns: Debit · Credit · Balance (a T-account has only two).

Date	Particulars	Debit	Credit	Balance
1	Opening balance			1000 Dr
5	Sales	500		1500 Dr
7	Return inwards		100	1400 Dr
8	Bank		1000	400 Dr

Benefit ✓: we get an up-to-date balance after every transaction — if Mr X phones on the 5th we can say "1500", on the 7th "1400". No need to balance the account at period end.

Drawback ✗: a lot of calculations — calculation-intensive ⇒ only suitable for computerised accounts (e.g. a bank statement: Debit / Credit / Balance, or Deposit / Withdrawal / Balance — banks use computers).

3. Types of Accounts

① Personal accounts

Belong to some person, individual or company. Two categories:

• Debtors = Trade Receivables — persons/companies we sold goods to on credit; they will pay us back.
• Creditors = Trade Payables — persons/businesses we bought goods from on credit; they expect money back from us.

② Impersonal accounts

All accounts that remain after personal accounts. Sub-divided into two:

4. Double Entry — Debit & Credit Nature

Double entry = the system on which all accounting is based (like the base of a building). Two terms: Debit and Credit. Left of an account = Dr, right = Cr — there is no logic why; just learn it.

Types of assets

	Non-current assets	Current assets
Nature	permanent — value doesn't change often	temporary — keeps fluctuating
Bought for	USE in the business, not resale	resale / will soon turn into cash
Kept for	more than 1 year	short term
Examples	building, motor vehicles, machine/plant, office equipment	inventory, trade receivables, bank, cash

Inventory = goods = stock = stock-in-trade = merchandise (e.g. phones in a mobile shop). It is an asset because selling it brings cash in future. Trade receivables = customers who owe us for credit sales.

5. The Four Stock Accounts

• Purchases a/c — buying stock / goods for resale (debit). Sales a/c — selling stock to customers (credit).
• Return inwards = sales return — customer sends goods back (faulty, damaged, wrong size/colour/specification, not ordered, or just not needed — "no questions asked" policy) → Dr.
• Return outwards = purchase return — we send goods back to supplier for the same reasons → Cr.

6. Double Entry — Transaction Table

To journalise an entry = record it as a debit and a credit. For each transaction, ask: which accounts are affected, did they go up or down, what is their nature? Every transaction = at least one debit and one credit.

A. Capital & non-current assets (1–4)

#	Type of transaction	Debit	Credit
1	Introduction of capital	Bank / NCA	Capital
2	Buy NCA	Motor Vehicle	Bank / Payable
3	Sell NCA	Bank / Receivable	Motor Vehicle
4	Return NCA to supplier	Bank / Payable	Motor Vehicle

1. Capital introduced: capital ↑ ⇒ Cr Capital. Owner brings bank/cash or a non-current asset (e.g. his own van from home) ⇒ asset ↑ ⇒ Dr Bank / Dr Motor vehicle.
2. Buy NCA (computer for a cash register, a vehicle): asset ↑ ⇒ Dr Motor vehicle / Equipment. Paid by cheque ⇒ bank ↓ ⇒ Cr Bank. Not paid yet (e.g. dealer gives 3 months) ⇒ liability ↑ ⇒ Cr Payable (name of dealer if known).
3. Sell NCA (no longer needed, e.g. delivery outsourced): asset ↓ ⇒ Cr Motor vehicle. Money received ⇒ Dr Bank/Cash. Sold on credit ⇒ Dr Receivable (or Mr Ahmed).
4. Return NCA to supplier (serious fault): asset leaves ⇒ Cr Motor vehicle. If already paid ⇒ refund ⇒ Dr Bank. If not yet paid ⇒ liability ↓ ⇒ Dr Payable (Mr Ahmed Motors) — no point paying for what we returned.

B. Goods / stock transactions (5–8)

#	Type of transaction	Debit	Credit
5	Purchase goods / inventory	Purchase	Bank / Trade Payable
6	Sold goods / stock	Bank / Trade Receivable	Sales
7	Returned goods from customer	Return Inwards	Bank / Trade Receivable
8	Return goods to supplier	Bank / Trade Payable	Return Outward

5. Purchase goods: Dr Purchases. Paid ⇒ asset (bank) ↓ ⇒ Cr Bank. Not paid ⇒ liability ↑ ⇒ Cr Trade payable (or supplier's name, e.g. XYZ Co.).
6. Sold goods: stock going out ⇒ Cr Sales. Cash received ⇒ Dr Cash; cheque ⇒ Dr Bank; on credit ⇒ Dr Trade receivable (customer / debtor, or Mr Ali).
7. Customer returns goods: Dr Return inwards (sales return). Already paid ⇒ we refund ⇒ Cr Bank/Cash. Not yet paid ⇒ Cr Customer a/c (trade receivable) — his debt falls.
8. We return goods to supplier: Cr Return outwards (purchase return). Already paid ⇒ refund received ⇒ Dr Bank. Not paid ⇒ liability ↓ ⇒ Dr Trade payable.

C. Expenses, income, payments, drawings & loans (9–14)

#	Type of transaction	Debit	Credit
9	Expense paid / incurred	Rent Expense	Bank / Accrued (liability)
10	Income received / earned	Bank / Accrued (asset)	Rent Received
11	Payment to supplier (creditor)	Trade Payable	Bank / Cash
12	Drawings in cash / goods from business	Drawings	Cash / Bank / Purchases
13	Received loan from bank	Bank	Loan Payable
14	Repaid loan to bank	Loan Payable	Bank

Why expenses are Dr and income is Cr

Expense = money spent for a business purpose — rent, electricity, bills, insurance, cleaning, heating / air-conditioning, internet, mobile. Always debit. Two ways to remember:

• Reason 1: we get benefit from expenses (renting a house = living in it, like owning it; electricity = lights & fans; insurance = cover) — just like an asset, which is debit.
• Reason 2: an expense reduces capital; capital is credit ⇒ anything reducing it is debit.

• Expense paid: Dr expense, Cr Bank/Cash (asset ↓). Incurred but not yet paid: a liability is created = accrued (e.g. accrued rent) — accruals & prepayments are a later topic, don't worry now.
• Income (profit / gain) = always credit because it increases capital (the business's profit adds to capital). Examples: rent received, commission received, discount received, fees received, consultancy income.
• Income received: cheque ⇒ Dr Bank; cash ⇒ Dr Cash; tenant hasn't paid yet ⇒ Dr Accrued income (an asset / receivable); Cr the income account (e.g. Rent received).

Payments, drawings & loans

• Payment to supplier (clearing a debt): liability ↓ ⇒ Dr Trade payable (Mr XYZ). Paid by cheque ⇒ Cr Bank; in cash ⇒ Cr Cash.
• Drawings = taking something out of the business for personal use (cash, cheque or stock) — e.g. shop owner takes an iPhone home, or cash for kids' school fees. Always Dr (reduces capital). Also called appropriation of profit.
  Cr depends on what was taken: cash ⇒ Cr Cash; cheque ⇒ Cr Bank; goods ⇒ Cr Purchases (we never use the stock a/c in the year).
• Loan received from bank: bank asset ↑ ⇒ Dr Bank; liability ↑ ⇒ Cr Loan payable (e.g. loan from Barclays). Businesses borrow when they lack capital from themselves / family / friends.
• Loan repaid: bank asset ↓ ⇒ Cr Bank; liability ↓ (extinguished) ⇒ Dr Loan payable.

★ Quick Recap — Cheat-Sheet