Numerous transactions take place in business concerns every day which must be properly analysed and recorded. To record these transactions different accounts are maintained in the ledger.
Account is the individual record of an asset, a liability, a revenue, an expense or capital, in a summarized manner. For example, the individual record of sales is ‘sales account’. In the same way there are so many accounts which are opened in the ledger like salary account, machinery account, furniture account etc.
CLASSIFICATION OF ACCOUNTS
Accounts are basically classified into 3 categories :-
Personal Account –
- Natural personal account
- Artificial personal account
- Representative personal account.
Real Account –
- Tangible real account
- Intangible real account
Personal Accounts are the ones that are related with individuals, companies, firms, group of associations etc. Few examples are debtors, creditors, accounts of customers, accounts of goods suppliers, capital, drawings, etc.
These are further classified as :-
- Natural Personal Account :- These accounts relate to natural persons such as Ram’s a/c , Sonia’s ac etc
- Artificial Account :- . Personal accounts which are created artificially bylaw, such as corporate bodies and institutions, are called Artificial personal accounts. g. private companies, LLCs, schools etc.
- Representative Account :- Accounts that are a representative of some person are called as representative accounts. Example , prepaid expense ac.
Golden rule for personal account is :- Debit the receiver and credit the giver.
Example: Payment of salary to employees
Here, the receiver is an employee and the giver will be the company. Hence, in the journal entry, the Employee’s Salary account will be debited and the Cash / Bank account will be credited.
All assets of a firm, which are tangible or intangible, fall under the category of ‘Real Accounts’. These are of 2 types –
- Tangible Real Accounts :- Tangible Real Accounts are accounts which have physical existence. Ex – land, furniture etc.
- Intangible Real Accounts :- Intangible real accounts are those which do not have any physical existence. For ex- patents.
Golden rule for real accounts is – Debit What Comes In, Credit What Goes Out.
For Example – Furniture purchased by an entity in cash. Debit furniture A/c and credit cash A/c.
Accounts which are related to expenses, losses, incomes or gains are called Nominal accounts. These components actually do not exist in any physical form but they actually exist.
For Example, Wages A/c, Salary A/c, Rent A/c etc.
Golden rule for Nominal account :- Debit All Expenses and Losses, Credit All Incomes and Gains.
Hence, whenever a business undertakes transactions, it must identify the accounts involved and then apply the required accounting standards and golden accounting rules to record such transactions.