Financial Accounting Concepts

Classification of Accounts in Bookkeeping

The journal is the primary record book. All entries are made chronologically; that is when they occur. Transactions in the journal are documented using solely debit and credit rules.

For the purpose of recording, these transactions are classified into 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 double-entry bookkeeping, viz.

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

Let’s discuss these in detail:-

Personal accounts

Personal accounts are related to the individual, debtors, or creditors. The account of John’s Capital A/c., a credit customer or the account of Harry & Co., a provider of goods, are both examples of this. The capital account is a type of financial account. In addition to being the account of the proprietor and the proprietor, it is also adjusted on the basis of profits and losses, among other things. Personal accounts are further divided into three categories:

  • The natural personal account relates to the transactions of human beings like Harry, Clarke, etc.
  • Artificial Personal Account – business entities are treated as areas having a separate entity for business purposes. In the eyes of the law, they are treated as a person for dealing with other persons. For example – Banks, Government, Companies etc.
  • Representative Personal Account – these are not in the name of any person, but they represent the personal accounts. For example, outstanding liability for expenses or prepaid expenses paid in advance etc.

Real accounts

Real accounts are linked to the assets of a company enterprise and are therefore more accurate. Liabilities, on the other hand, are not genuine accounts. The asset could be a tangible object such as a building or furniture, or it could be an intangible asset such as goodwill, among other things.

Permanent in nature, real accounts are carried from one accounting period to the next without being revalued. Land, deposits, investments, cash in hand, cash at the bank, and other types of real accounts are examples of real accounts.

Nominal accounts

Nominal accounts are associated with the element of revenues, expenses, gains, and losses. All nominal accounts are transient and are closed after each transaction period. They are credited to the profit and loss account, and the profit and loss account’s balance is credited to the capital account.

Salary, commission, rent paid, and advertisement charges are examples of nominal accounts. Profit and loss accounts, used to calculate the gains and losses associated with any transaction, are also nominal accounts, such as Profit and Loss A/c.

Golden Rules of Accounting

Each of the accounts mentioned above has two rules, one for debit and one for credit, to document transactions. This is sometimes referred to as the golden accounting rule. Because all transactions must be documented using the double-entry method.

  • 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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