Specific Format for Accounting - Target to be achieved

We understand that the manner in which Mr. Oberoi was maintaining the
accounting records had a limitation in not being able to provide the information
that he needed at a place, ready hand. He was made aware by the professional
accountant that he had to adopt a distinct method of recording accounting
transactions to achieve his obective.

What should Mr. Oberoi's objective/target be?

What was Mr. Oberoi looking for? What is the objective that he should try
achieving through the different format for recording the accounting transactions?

Mr. Oberoi was trying to find the amount due to or due from Mrs. Vimla. It would
have been conveniently derived had he had all the information relating to Mrs.
Vimla at a single place.

Making all the information relating to Mrs. Vimla available at a single place is the
objective that Mr. Oberoi should try to achieve through the specific format for
recording accounting transactions.

Specific Format for Accounting - Target to be achieved

The target to be achieved by maintaining a specific format for recording accounting
transactions is collecting all the information relating to an element at a single place.

Elements in Accounting/Accounts - Account Heads

Element
 A small part of the total whole
 constituent
 part
 building block
 component
 ingredient
 factor
 aspect
  whole

Element/Account-Head in accounting
An element for the purpose of accounting is that aspect or entity relating to
which we wish to find, know or derive information.

Each element in accounting is identified as an account or an accounting head.

Some examples of accounting elements

We wish to know

 The amount of capital invested in the business.

Capital is an element — We identify it as Capital a/c.

 The value of Furniture with us in the business.

Furniture is an element — We identify it as Furniture a/c.

 The amount of expenditure on account of salaries.

Salaries is an element — We identify it as Salaries a/c.

 The amount due to us from Mrs. Vimla.

Mrs. Vimla is an element — We identify it as Mrs. Vimla's a/c.

 The amount we owe the wholesaler Mr. Rathod.

Mr. Rathod is an element — We identify it as Mr. Rathod's a/c.

 The amount available in the bank.

Bank is an element — We identify it as Bank a/c.

 The value of sales made by us.

Sales is an element — We identify it as Sales a/c.

 This list is endless ...

How many Elements/Accounting-Heads are used in
accounting?
The number of elements used for the purpose of accounting in an organisation is
not a static figure. It is dependent on the information needs of the organisation.

Taking the case of expenses incurred by an organisation,

 Where the organisation feels that its informational need is minimum, it

may consider all the expenses as a single aspect or element and
identify it by the name Expenses a/c.
 Where the organisation feels that it needs more (or detailed)
information with regard to expenses, it may consider each expense (or
a group of expenses) as a distinct aspect or element.

In such a case, each expense is distinctly identified by an alement such

as Salaries a/c, Rent a/c, Telephone Charges a/c, Miscellaneous
Expenses a/c etc. All these smaller elements together would represent
the total expenditure of the organisation.

We understand the number of elements used for the purpose of accounting as

the number of elements into which an organisation is divided for the purpose of
accounting which is dependent on the amount of information that an
organisation needs.

Greater the information needed, greater the number of elements (accounting

heads) into which the organisational accounting system is divided.

The more the information we need, the more the accounting heads we need to maintain.

Separate Entity Concept

In accounting for business transactions, we should segregate ownership and
business. The owner is alien to business. The owner is a party from whom the
business can take or receive and to whom it can give.

If we do not see the owner and the business as separate entities, we cannot
think of transactions involving capital like when capital is being brought in and
amounts are being withdrawn by the ownership.
If the owner is not a separate entity, then these would amount to the owner
giving to himself and taking from himself.

This gives us an understanding of one another important and fundamental

concept of accounting, The Separate Entity Concept - Ownership and business
are not one and the same.

Separate Entity Concept

The owner is also an alien to the business.

Capital a/c, Drawings a/c - Special Elements

In an accounting system, in deriving the information relating to ownership, we
use the element Capital to represent the owner. This is done to identify owned
capital and loaned capital distinctly. If we are using the name of the owner to
represent him, then it might be giving us an idea that he is another creditor.

Therefore Mr. Oberoi's name would not appear in the list of account heads used
for his organisational accounting.

Capital a/c
Capital is an element used to derive information relating to the amounts brought
into or invested in the organisation by the owner as his contribution towards
capital. It represents the owner of the business.

Optionally the element name or account head may be prefixed with the name of
the owner. Accordingly the account representing Mr. Oberoi's contribution may
be called Capital a/c or Oberoi's Capital a/c.

Where there are multiple owners, the account representing each's contribution is
prefixed with the name of the owner to create distinction between the various
capital accounts. Robert's Capital a/c, Ram's Capital a/c, Shyam's Capital a/c etc.

Drawings a/c
Drawings is an element used to derive information relating to the amounts
withdrawn by the owner from the organisation for his personal purposes. It is
also an element representing the owner of the business.
Optionally the element name or account head may be prefixed with the name of
the owner. Accordingly the account representing Mr. Oberoi's drawings may be
called Drawings a/c or Oberoi's Drawings a/c.

Where there are multiple owners, the account representing each's drawings is
prefixed with the name of the owner to create distinction between the various
drawings accounts. Robert's Drawings a/c, Ram's Drawings a/c, Shyam's
Drawings a/c etc.

Note
If we do not wish to have the information relating to the capital brought in and
amount withdrawn separately, only one account is maintained by name Capital
a/c instead of two. In such a case, the amount withdrawn by the proprietor for
personal purposes would be treated as capital taken back by the proprietor.