3 Different types of accounts in accounting are Real, Personal and Nominal Account. Real account is then classified in two subcategories – Intangible real account, Tangible real account. Also, three different sub-types of Personal account are Natural, Representative and Artificial. In this article, we will see the 3 golden rules of accounting with examples. Let’s begin.
Table of content
1 Suggested Videos
2 Types of Accounts – Real, Personal and Nominal Account
2.1 Classification of Accounts in Accounting
2.2 Personal Account
2.3 Rule for this Account
2.4 Real Accounts
2.4.1 Tangible Real Accounts
2.4.2 Intangible Real Accounts
2.5 Real Account Rules
2.6 Nominal Account
2.6.1 Rules
3 Examples on Types of Accounts
Suggested Videos
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Accounting is a process of recording, classifying and summarizing financial transactions in a significant manner and interpreting results thereof. Accounting is both science and art.
For every type of entity, whether it is large in size or small in size, it is very important to have a proper system of accounting for proper management of an entity’s business operations. An accountant must have a good understanding of the terms used in accounting and types of accounts.
An account is the systematic presentation of all the transactions related to a particular head. An account shows the summarized records of transactions related to a concerned person or thing.
For Example: when the entity deals with various suppliers and customers, each of the suppliers and customers will be a separate account.
An account may be related to things which can be tangible as well as intangible. For example – land, building, furniture, etc. are things.
An account is expressed in a statement form. It has two sides. The left-hand side of an account is called a Debit side whereas right-hand side is called as Credit side. The debit is denoted as ‘Dr’ and credit is denoted as ‘Cr’.
Classification of Accounts in Accounting
- Personal Account
- Real Account
- Tangible Real Account
- Intangible Real Account
- Nominal Account
Personal Account
These accounts types are related to persons. These persons may be natural persons like Raj’s account, Rajesh’s account, Ramesh’s account, Suresh’s account, etc.
These persons can also be artificial persons like partnership firms, companies, bodies corporate, an association of persons, etc.
For example – Rajesh and Suresh trading Co., Charitable trusts, XYZ Bank Ltd, C company Ltd, etc.
There can be personal representative accounts as well.
For example – In the case of Salary, when it is payable to employees, it is known how much amount is payable to each of the employee. But collectively it is called as ‘Salary payable A/c’.
Rule for this Account
Debit the receiver.
Credit the Giver.
For Example – Goods sold to Suresh. In this transaction, Suresh is a personal account as being a natural person. His account will be debited in the entry as the receiver.
Learn more about Accounting here in detail
Real Accounts
These account types are related to assets or properties. They are further classified as Tangible real account and Intangible real accounts.
Learn more about Accounting Cycle here in detail.
Tangible Real Accounts
These include assets that have a physical existence and can be touched. For example – Building A/c, cash A/c, stationery A/c, inventory A/c, etc.
Intangible Real Accounts
These assets do not have any physical existence and cannot be touched. However, these can be measured in terms of money and have value. For Example – Goodwill, Patent, Copyright, Trademark, etc.
Real Account Rules
Debit what comes into the business.
Credit what goes out of business.
For Example – Furniture purchased by an entity in cash. Debit furniture A/c and credit cash A/c.
Learn more about Classification of Accounting here in detail
Nominal Account
These accounts types are related to income or gains and expenses or losses. For example: – Rent A/c, commission received A/c, salary A/c, wages A/c, conveyance A/c, etc.
Rules
Debit all the expenses and losses of the business.
Credit the incomes and gains of business.
For Example – Salary paid to employees of the entity. Salary A/c will be debited when the expenses are incurred. Whereas, when an entity receives any interest, discount, etc these are credited whenever these are received by the entity.
There are some other accounts in accounting as well:
- Cash Account – This account is used for keeping the records of payments done by cash, withdrawals, and deposits.
- Income Account – Purpose of this account is to keep the record of the income sources of business.
- Expense Account – This account tracks the expenditure of the business.
- Liabilities – If there is any debt or loan then that amount comes under liabilities.
- Equities – If there is an investment of the account owner or common stocks, retained earnings then these will fall under equities.
Examples on Types of Accounts
Write the accounts affected and applicable rule in the below-mentioned transactions.
- Goods purchased for cash.
- Cash Sales.
- Sale of fixed assets
- Payment of expenses.
Answer–
1. Debit Purchase account and credit cash account.
Rule Applicable: – Debit increase in expense or an asset. Credit decrease in assets.
2. Debit Cash account and credit sales account.
Rule Applicable: – Debit Increase in assets. Credit Decrease in revenue or assets.
3. Debit Expenses account and credit cash/bank account.
Rule Applicable: -Debit Increase in expense. Credit Decrease in assets.
This article delves into fundamental concepts within accounting, categorizing accounts into three main types: Real, Personal, and Nominal. I can offer insights into these concepts and their subcategories.
Accounts in accounting serve as systematic records of transactions related to specific entities or aspects. Personal accounts revolve around individuals or entities, such as suppliers, customers, or organizations. Personal accounts further branch into Natural (individuals) and Artificial (organizations or entities) categories.
The rule for Personal accounts is straightforward: "Debit the receiver, credit the giver." For instance, when goods are sold to an individual (receiver), their account is debited, indicating an increase in their indebtedness.
Real accounts focus on assets and are divided into Tangible (physical assets like buildings, cash, inventory) and Intangible (assets without physical form but with value, such as goodwill, patents) accounts. The rule governing Real accounts is "Debit what comes into the business, credit what goes out." For example, when an entity purchases furniture (an asset), the furniture account is debited, and the cash account is credited.
Nominal accounts relate to incomes, gains, expenses, or losses. Examples include Rent, Salary, Wages, etc. The rule for Nominal accounts is "Debit all expenses and losses, credit all incomes and gains." For instance, when an entity pays salaries to employees, the Salary account is debited (reflecting an increase in expenses).
Additionally, there are other types of accounts in accounting:
- Cash Account: Records cash-related transactions like payments, withdrawals, and deposits.
- Income Account: Documents the sources of income for a business.
- Expense Account: Tracks the expenditures incurred by a business.
- Liabilities: Reflects debts or loans owed by the entity.
- Equities: Encompasses investments made by the account owner, common stocks, retained earnings, etc.
Regarding the examples provided:
- Goods purchased for cash: Debit Purchase account, credit Cash account. Rule: Debit increase in expense or asset, credit decrease in assets.
- Cash Sales: Debit Cash account, credit Sales account. Rule: Debit increase in assets, credit decrease in revenue or assets.
- Sale of fixed assets: Transaction details aren't specified, but it typically involves debiting Cash or Accounts Receivable and crediting Fixed Asset account.
- Payment of expenses: Debit Expenses account, credit Cash/Bank account. Rule: Debit increase in expense, credit decrease in assets.
Understanding these classifications and rules helps maintain accurate financial records and comprehend the impacts of various transactions on a company's financial health.
