- To keep a company's financial data organized, accountants developed a system that sorts transactions into records called "Accounts".
- When a company's accounting is setup, the accounts most likely to be effected by company's transactions are identified and listed out.This list is referred to as the company's "chart of accounts".
Types of Accounts:
Every Transaction will have two aspects. Which are:
- Giving
- Receiving
Personal Account:
- The accounts which represents persons and organisations.
- For example, Partnership account, Bank Account, Capital account.
The transaction below demonstrates the interaction between two different personal accounts, one of which is a private limited company and the other one is a bank.
- Paid Unreal Pvt Ltd. 24,000 by check
- The amount will be 24,000 in both debit and credit.
Accounts Involved | Debit/Credit | Rule Applied |
---|---|---|
Unreal Pvt Ltd. A/C | Debit | Artificial personal so a/c Dr. the receiver |
To Bank A/C | Credit | Artificial personal so a/c Cr. the giver |
Real Account:
- Asset accounts and liability accounts comes under this type of account.
- Example for Asset accounts are land, building, cash, inventory etc.
- Example for Liability accounts are loans, accounts payable etc.
Example:
The transaction below demonstrates the interaction between two different real accounts: one is furniture and other is cash, both of them are assets of the company and hence classified as real accounts.
The transaction below demonstrates the interaction between two different real accounts: one is furniture and other is cash, both of them are assets of the company and hence classified as real accounts.
- Purchased furniture for 10,000 in cash
- The amount will be 10,000 in both debit and credit.
Accounts Involved | Debit/Credit | Rule Applied |
---|---|---|
Furniture A/C | Debit | Furniture is real a/c so Dr. What comes in |
To Cash A/C | Credit | Cash is real a/c so Cr. What goes out |
Nominal Account:
- These are accounts of expenses & losses which a business suffer and income & gains which a business earn in the course of business.
- For Example, salaries, taxes, rent account, interest account etc.
Example:
The following example shows a transaction where a nominal account deal with real account.
The following example shows a transaction where a nominal account deal with real account.
- Purchased goods for 15,000 in cash
- The amount will be 24,000 in both debit and credit.
Accounts Involved | Debit/Credit | Rule Applied |
---|---|---|
Purchase A/C | Debit | Nominal a/c so Dr. all expenses |
To Cash A/C | Credit | Real a/c so Cr. what goes out |
Golden Rule for all in shortcut method:
Type | Increase | Decrease |
---|---|---|
Asset | Debit | Credit |
Liability | Credit | Debit |
Expense | Debit | Credit |
Income | Credit | Debit |