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.
- Personal Accounts
- Real Accounts
- Nominal Accounts
Let’s discuss these in detail:-
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 Accounts – 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 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 are associated with the elements 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
The golden rules of accounting are a set of fundamental principles that guide the recording and reporting of financial transactions.
These rules are based on the concept of double-entry accounting, which states that every financial transaction affects two accounts. The golden rules help to ensure that accounting records are accurate, complete, and consistent.
- The personal account is recorded using the rule
Debit the receiver
Credit the giver
This rule applies to all accounts, regardless of their type. When an asset increases, it is debited. When an asset decreases, it is credited. When a liability decreases, it is debited. When a liability increases, it is credited. When equity increases, it is credited. When equity decreases, it is debited.
- The real account is recorded using the rule
Debit what comes in
Credit what goes out
This rule applies to personal accounts. When someone receives something from the company, their account is debited. When someone gives something to the company, their account is credited.
- The nominal account is recorded using the rule
Debit all expenses and losses
Credit all income and gains
This rule applies to nominal accounts. Expenses and losses are debited because they decrease the company’s equity. Income and gains are credited because they increase the company’s equity.
These rules may seem simple, but they are essential for accurate financial reporting. By following the golden rules, businesses can ensure that their financial statements are a reliable reflection of their financial position and performance.
The classification of accounts is an essential part of bookkeeping and financial reporting. By understanding the different categories of accounts, businesses can effectively organize and analyze their financial information, make informed decisions, and maintain financial stability.