What is Accounts?
Where there is business, there are transactions. There are number of transactions recorded everyday when you are engaged in any business. Such transactions has to be recorded at a certain place for future reference to the past transactions for calculating the credibility and financial status of a business. Transactions that are included are as follows:
- Goods sold to customers.
- Goods purchased from suppliers.
- Cash paid to creditors.
- Money received from debtors.
- Additional expenses incurred in business.
- Money spent to purchase assets.
The above mentioned transactions has to be analysed properly and recorded in a systematic way to avoid confusion of any type in future. The concept of double entry in a business transaction is necessary and important concept to be understood by the accountant or proprietor of the business. These transactions are recorded and altered in ledger only.
Accounts are referred as individual record of assets, liabilities, expenses or revenue generated through a business in a systematic manner. There are types of accounts prepared in ledger for clear understanding of business status. For example- salary account, machinery account and sales account etc.
These types of accounts are further classified in three categories of accounts which are as follows:
- Real account
- Personal account
- Nominal account
1. Real account
The various types of assets a firm or any business entity owns fall under the category of real account.
- Tangible Assets
Anything which we can touch or feel physically are classified as tangible. The various types of tangible assets included in business or real accounts are building, machinery, live stock, land etc.
- Intangible Assets
Anything that cannot be touched or felt physically is known as Intangibles. The various types of Intangible assets included under real account are goodwill, patents and trademarks of registration firm etc.
The golden rule of accounts involved in transactions under real account is as follows:
Debit what comes in
Credit what goes out
For the better understanding of the concept of real account under types of accounts, here are two transactions showed as under:
First one is furniture and the second on is cash. Both the transaction are recorded under real account.
‘A’ purchased furniture as assets for the company on cash.
|Rules applied||Debit/Credit||Account involved|
|Debit what comes in||Debit||Furniture a/c|
|Credit what goes out||Credit||To cash a/c|
The amount involved in both transaction should be same and it should be debited or credit accordingly
2. Personal Account
The various types of transactions which are related to individuals, firms, companies or any business entity are recorded under personal account. The transactions included in personal account are debtor, creditor, banks, goods purchased from suppliers, capital or drawings etc. The entries of personal account are further classified under Natural, Artificial and Representative personal account.
- Natural personal account
The transactions which are related to any person who is living or god created and ha ability to deal in various transaction are included under natural personal account. The types of accounts that are included as under are Kunal’s A/C, Eve’s A/C etc.
- Artificial personal account
The transactions under this account has separate entity or branch are created by law and doesn’t involve any god creations. The accounts involved under artificial personal account are any Private limited company, clubs, schools or LLC’s etc.
- Representative personal account
The transaction which are related to the account of certain person, company, group of people directly or indirectly. The transaction recorded under this account involves, wages paid in advance or outstanding to be paid to the employee. Separate account has to be prepared in books of accounts for such transactions. These transactions are related to any person or company directly or indirectly because separate account is prepared which is related to certain person.
The golden rule of accounts involved in transactions under personal account are as follows;
Debit the receiver
Credit the giver
There are two different accounts prepared as under where first is related to Private limited company and second is related to bank.
Amount of Rs. 21,000 is paid to unreal Pvt. Ltd. Company via check.
|Accounts involved||Debit/credit||Rule applied|
|Unreal pvt. Ltd. Company a/c||Debit||Debit the receiver|
|Bank a/c||Credit||Credit the giver|
3. Nominal Account
The types of transaction which related to the expenses, losses, profits, income or gains are recorded under Nominal account. The literal meaning of ‘nominal’ is ‘existence in name only’. The meaning of nominal explain its account in true sense as the transaction involved under this account doesn’t really exist physically but are present in fact as it involves money transaction. It includes Purchase A/C, Salary A/C etc.
The crux of nominal account is profit or loss account which is later transferred to capital account.
The golden rule of accounts involved in nominal account transaction are as follows:
Debit all expenses and losses
Credit all incomes and gains
The following example involves transaction which is related to both real and nominal account.
Goods worth Rs. 10,000 purchase in cash
|Accounts involved||Debit/Credit||Rule Applied|
|Purchase a/c||Debit||Debit all expenses|
|Cash a/c||Credit||Credit what goes out|
It is very important to understand the concept of types of accounts involved for various transaction as you should be thorough with these concept or else you will end up recording wrong or incorrect journal entries.