Classification of Accounts

Posted in Accounting, Financial Accounting, Management Accounting on Feb 14th, 2014 | 0 comments

Accounts are Classified as Follows

Accounts in the names of persons are known as “Personal Accounts”

Accounts in the names of assets are known as “Real Accounts”

Accounts in respect of expenses and incomes are known as “Nominal Accounts”

 

 Personal Accounts

It deals with accounts relating to persons, firms, companies and man-made institutions. It is further classified into three categories as shown below.

NATURAL PERSON’S A/C :   e.g- David, Customer

ARTIFICIAL PERSON’S  A/C :   e.g- Banks, firms, companies

REPRESENTATIVE’S A/C : e.g- Capital, Drawings

Real Accounts

These are accounts of assets or properties. Assets may be tangible or intangible. Real accounts are impersonal which are tangible or intangible in nature.

Eg:- Cash a/c, Building a/c, etc are Real Accounts related to things which we can feel, see and touch.

Goodwill a/c, Patent a/c, etc Real Accounts which are of intangible in nature.

Nominal Accounts

These accounts are impersonal, but invisible and intangible. Nominal accounts are related to those things which we can feel but cannot see and touch. All “expenses and losses” and all “incomes and gains” fall in this category.

Eg:- Salaries A/C, Rent A/C, Wages A/C, Interest Received A/C, Commission Received A/C, Discount A/C, etc.

Debit and Credit: Each accounts have two sides – the left side and the right side. In accounting, the left side of an account is called the “Debit Side” and the right side of an account is called the “Credit Side”. The entries made on the left side of an account is called a “Debit Entry” and the entries made on the right side of an account is called a “Credit Entry”.

Golden Rules of Book-Keeping

1. Personal Accounts: DEBIT THE RECEIVER & CREDIT THE GIVER
2. Real Accounts: DEBIT WHAT COMES IN & CREDIT WHAT GOES OUT
3. Nominal Accounts: DEBIT ALL EXPENSES AND LOSSES & CREDIT ALL INCOME AND GAINS

What is an Accounting Equation?

It is a statement of equality between the debits and the credits. It explains that the assets of a business are always equal to the total of liabilities and capital. It is also called the balance sheet equation.

Assets = Liabilities + Capital

A = L + C

ASSETS ARE THE TOTAL VALUE OF PROPERTIES OWNED BY THE BUSINESS

LIABILITIES ARE THE RIGHTS OF THE THIRD PARTIES TO THE PROPERTIES OF THE BUSINESS OR THE AMOUNT DUE BY THE BUSINESS TO THE THIRD PARTIES.