Financial Accounting

Classification of Accounts

Journal is the prime books of entries. All entries are recorded in chronological order i.e. as and when they occur. Transactions in the journal are recorded on the basis of the rules of debit and credit only.

For the purpose of recording, these transactions are classified in the three groups.

  • Personal transaction.
  • Transaction related to assets and properties.
  • Transaction related to expenses, losses, income, and gains.

Classification of Accounts

Accounts can be categorized into three categories for the purpose of double-entry bookkeeping viz.

  1. Personal Accounts
  2. Real Accounts
  3. Nominal Accounts

Let’s discuss these in detail:-

  • Personal account: Personal accounts relate to the person, debtors or creditors. An example would be; the account of John’s Capital A/c., credit customer or the account Harry & Co. a supplier of goods. The capital account Is the account of the proprietor and the proprietor, it is also adjusted on account of profits and losses etc. personal accounts are further divided into three categories:
  1. Natural personal account – it relates to the transactions of human beings like Harry, Clarke etc.
  2. Artificial Personal Account – for business purposes, business entities are treated areas having a separate entity. They are treated as a person in the eyes of the law for dealing with the other persons. For example – Banks, Government, Companies etc.
  3. Representative Personal Account – these are not in the name of any person but these represent the personal accounts. For example outstanding liability for expenses or prepaid expenses paid in advance etc.
  • Real accounts – Real accounts are those which are related to the assets of the business enterprise. But liabilities are not real accounts. The asset may include tangible assets like building, furniture etc or an intangible asset like goodwill etc.
    Real accounts are permanent in nature and carried over from one accounting period to another. Other examples of real accounts are land, deposits, investments, cash in hand, cash at bank etc.
  • Nominal accounts – Nominal accounts are related to the incomes, expenses, gains, and losses aspect. All nominal accounts are temporary in nature and are closed at the end of each account ting period. They are transferred to profit and loss account and balance of profit and loss account is transferred to the capital account.
    Main examples of nominal accounts are salary, commission, rent paid, advertisement expenses etc. Accounts used to calculate profits and losses of any kind of transactions also are nominal accounts like Profit and Loss A/c.

Golden Rules of Accounting

All the above-mentioned accounts have two rules for each, one is related to debit while other is related to credit for the purpose of recording the transactions. This is also called the golden rule of accounting. Because all transactions will have to be recorded on the basis of the double-entry system

  • The personal account is recorded using the rule

Debit the receiver

Credit the giver

  • The real account is recorded using the rule

Debit what comes in

Credit what goes out

  • The nominal account is recorded using the rule

Debit all expenses and losses

Credit all income and gains

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