Types of accounts and the rules for making entries in accounting is fundamental to recording business transactions properly. The term "types of accounts" refers to the nature and classification of accounts in accounting, and they are generally divided into five key groups:
Assets
Liabilities
Capital
Expenses/Losses
Revenues/Gains
Based on above these groups, accounts are mainly classified into two broad types:
Personal Accounts
Impersonal Accounts
Impersonal accounts are further divided into two subtypes: • Real Accounts • Nominal Accounts
Therefore, the three main types of accounts are:
Personal Accounts
Real Accounts
Nominal Accounts
Rules for Making Accounting Entries (Golden Rule)
To ensure transactions are recorded correctly, accounting follows a set of principles known as the "Golden Rules of Accounting." These rules depend on the type of account involved. Below are the basic rules for recording transactions accurately.
1. Personal Accounts
Personal accounts relate to individuals or entities. For example, if a loan of Rs. 50,000 is taken from Mr. XYZ, his account is classified as a personal account. The rules for making entries in personal accounts are:
Debit: The receiver
Credit: The giver
In the loan example, Mr. XYZ's account would be credited because he is the giver of the loan. When the loan is repaid, his account would be debited as he becomes the receiver of the money. Personal accounts are debited or credited when amounts are receivable or payable to individuals or entities, either due to a transaction or prior obligations.
2. Impersonal Accounts
Impersonal accounts do not involve any specific person. They are further classified into two subtypes: Real Accounts and Nominal Accounts.
a) Real Accounts
Real accounts represent tangible assets—those that can be physically seen and touched. Examples include cash, machinery, furniture, and vehicles. The rules for making entries in real accounts are:
Debit: What comes in
Credit: What goes out
For instance, if furniture is purchased on credit for Rs. 50,000 from M/s Rahul Furniture, two accounts are involved: the furniture account (real account) and M/s Rahul Furniture's account (personal account). The furniture account is debited because it represents something coming in, and M/s Rahul Furniture's account is credited because they are the giver.
b) Nominal Accounts
Nominal accounts represent expenses, incomes, losses, or gains. These accounts do not exist in a physical form and are only concepts in accounting. Examples include salary expenses, electricity expenses, and sales revenue. The rules for making entries in nominal accounts are:
Debit: All expenses and losses
Credit: All incomes and gains
For example, if Rs. 2,000 is paid for electricity, two accounts are involved: the cash account (real account) and the electricity expense account (nominal account). The electricity expense account is debited because it represents an expense, and the cash account is credited because cash is going out.
Similarly, if a sale of Rs. 50,000 is made for cash, the cash account is debited (real account: "what comes in"), and the sales account is credited (nominal account: "incomes and gains").
If we analyse the types of accounts, their categories, we can summarize the following:
Categories of Personal Accounts: Liabilities, Capital, and Assets
Categories of Real Accounts: Only Assets
Categories of Nominal Accounts: Expenses/Losses and Revenues/Gains
If you find it challenging to understand the Golden Rules of Accounting for making accounting entries, our previous blog post, "Accounting Rules for Debits and Credits," will help clarify these rules.
We will now explore a fundamental aspect of accounting—the basis of accounting, which plays a vital role in determining how profit or income is calculated. Commonly referred to as the types of accounting, this will be the subject of our upcoming blog article.