Traditional Approach: Traditional approach to financial statement analysis includes the Profit and Loss Account (i.e. Income Statement) and the Balance Sheet.
Rules apply for Debit and Credit in the Traditional approach, such as
- Debit is what comes in whereas credit is what goes out.
- Debit refers to the expenses and the losses, and
- Credit refers to the income and gains.
In traditional Approach accounts divided in three categories:
1. Personal accounts: These represent the accounts related to individuals, firms, societies, clubs, hospital, etc.
a) Natural personal account: These accounts relate to human being.
b) Artificial Account: These relate to organizations which are treated as artificial persons in the eyes of law, such as accounts of firms., clubs, colleges etc.
c) Representative personal accounts: Sometimes, special accounts are opened to represent indirectly a group of persons. These are called ‘Representative Personal Accounts.
2. Real accounts:
a) Tangible real accounts: These accounts relate to those assets which can be touched and seen. For example: Plant Account, Equipment Account etc.
b) Intangible real accounts: These accounts relate to those assets which are not possible to touch in physical sense but can be measured in term of rupee, For example Goodwill, Copy rights.
3. Nominal accounts: These accounts relate to business expenses, losses, gains and income. For example: Salaries account, Wages Account.
Modern Approach: Modern approach is divided into six categories:
1. Assets: These include accounts related to Cash Bank, Debtors, Stock, Land & Buildings, Plant & Machinery etc.
2. Liabilities: These include accounts of outsiders such as Creditors, Bills payable, Borrowings, Bank Loan, Outstanding expenses, Overdraft etc.
3. Capital: It relates to Capital Account and Drawing Account
4. Revenue: Examples of revenue are Bad debts recovered, Interest received, Commission received, Sales, Rent received etc.
5. Expenses & losses: Examples of expenses and looses are salaries, wages, carriage, Postage, Stationery, Advertisement, Rent, Bad debts etc.