According to the double entry system of bookkeeping, there are three types of accounts that help you to maintain an error-free record of your journal entries. Each account type has a rule to identify its debit and credit aspect called as the Golden Rule of Accounting. The accounts are:
- Personal Accounts
- Real Accounts
- Nominal Accounts
Personal Accounts
Ledger accounts that contain transactions related to individuals or other organizations with whom your business has direct transactions are known as personal accounts. Some examples of personal accounts are customers, vendors, salary accounts of employees, drawings and capital accounts of owners, etc.
The golden rule for personal accounts is: debit the receiver and credit the giver.
Example: Payment of salary to employees
In this example, the receiver is an employee and the giver will be the business. Hence, in the journal entry, the Employee’s Salary account will be debited and the Cash / Bank account will be credited.
Real Accounts
The ledger accounts which contain transactions related to the assets or liabilities of the business are called Real accounts. Accounts of both tangible and intangible nature fall under this category of accounts, i.e. Machinery, Buildings, Goodwill, Patent rights, etc. These account balances do not come to zero at the end of the financial year unless there is a sale of the asset or payment made towards a liability or closure or acquisition of the business. These accounts appear in the Balance Sheet and the balances get carried forward to the next financial year.
The golden rule for real accounts is: debit what comes in and credit what goes out.
Example: Payment made for a loan
In this transaction, cash goes out and the loan is settled. Hence, in the journal entry, the Loan account will be debited and the Bank account will be credited.
Nominal Accounts
Transactions related to income, expense, profit and loss are recorded under this category. These components actually do not exist in any physical form but they actually exist. For example, during the purchase and sale of goods, only two components directly get affected i.e money and stock. But, apart from this we may incur profit or loss out of such transactions and we might incur some expenses for these transactions to happen. These secondary components fall under the Nominal Category and the accounts that are in Profit and Loss statement are shown under this category.
The golden rule for nominal accounts is: debit all expenses and losses and credit all income and gains.
Example of Nominal Account: Shipping Charges account and Salary account.
FAQs
Personal Account. Personal Accounts are related to individuals, firms, companies, etc. Example: Debtor, Creditor, Banks, Outstanding account, prepaid accounts, accounts of customers, accounts of goods suppliers, capital, drawings, etc. Here giver and receiver will be individuals, firms, companies, etc.
What are the six basic accounts? ›
These are asset accounts, liability accounts, equity accounts, revenue accounts, and expense accounts. These categories are universal to all businesses. If necessary, you may include additional categories that are relevant to your business.
How many categories of accounting are there? ›
Three main types of accounting include financial accounting, managerial accounting, and cost accounting. Considering the differences in their working principle, each accounting type has different goals. However, all of them are equally important for a business organisation.
What are the key branches of accounting? ›
The eight branches of accounting include financial accounting, managerial accounting, cost accounting, tax accounting, auditing, accounting information systems, fund accounting, and international accounting.
What are the three golden rules of accounting? ›
The three golden rules of accounting are (1) debit all expenses and losses, credit all incomes and gains, (2) debit the receiver, credit the giver, and (3) debit what comes in, credit what goes out.
How to classify accounts in accounting? ›
The accounts are classified as asset accounts, liability accounts, capital or owner's equity accounts, withdrawal accounts, revenue/income accounts, and expense accounts, according to the modern approach.
What are 10 examples of nominal accounts? ›
Examples include rent, selling expenses, administrative expenses, salaries, wages, sales revenue, sales returns and allowances, bad debts, purchases, etc.
What are the three most important financial statements? ›
The income statement, balance sheet, and statement of cash flows are required financial statements. These three statements are informative tools that traders can use to analyze a company's financial strength and provide a quick picture of a company's financial health and underlying value.
What is the golden rule of personal account? ›
The golden rule for personal accounts is: debit the receiver and credit the giver. In this example, the receiver is an employee and the giver will be the business. Hence, in the journal entry, the Employee's Salary account will be debited and the Cash / Bank account will be credited.
What are the 5 elements of accounting? ›
There are five elements of a financial statement: Assets, Liabilities, Equity, Income, and Expenses. Each of these categories has its own unique set of information that is important to track for a business.
There are three different classes of accounting which are Financial Accounting, Cost Accounting, and Management Accounting.
What are the five account categories in the general ledger? ›
The general ledger tracks all of a company's accounts and transactions and serves as the foundation of its accounting system. It's typically divided into five main categories: assets, liabilities, equity, revenue, and expenses.
