What is an Account?
The account is nothing but an outline of the transactions undertaken by the business in respect of persons, their representatives, and things.
For instance, when a business enters into transactions with suppliers or customers, both suppliers and customers act as separate accounts.
Similarly, businesses purchasing tangible items like the plant, machinery, land, building, etc. treats each of the tangibles as individual accounts. Such accounts are related to things.
Thus, whenever a business undertakes transactions, it must identify the accounts involved and then apply the required accounting standards and golden accounting rules to record such transactions.
Further, an account is usually represented in a T-Format. Thus, a T Account has two sides to it. The left side is known as the debit side whereas the right side of an account is labeled as the credit side.
Types of Accounts
Accounts are classified into following categories:
As the name suggests, Personal Accounts are the ones that are related to individuals, companies, firms, groups of associations, etc. These persons could include natural persons, artificial persons, or representative persons.
Type of Personal Accounts
a. Natural Personal Account
These accounts relate to natural persons such as Veer’s A/c, Ayan’s A/c, Karen’s A/c, etc.
b. Artificial Accounts
These accounts relate to companies and institutions such as Kapoor Pvt Ltd A/c, Booker’s Club A/c, etc. Thus, companies and institutions are the entities that exist in the eyes of law.
c. Representative Accounts
Accounts that are representative of some people are called representative accounts. These include Outstanding Interest A/c, Outstanding Wages A/c, Prepaid Expense A/c, etc.
Golden Rule Related To The Personal Account
Debit the Receiver, Credit the Giver
Illustration
Karan purchased machinery from M/s Sharma worth Rs 10,00,000 on credit. So, this transaction involves two accounts: a Personal Account of M/s Sharma and a Machinery Account. Thus, purchasing machinery worth Rs 10,00,000 on credit means that M/s Sharma is providing the Machinery to Karan for his business. The Golden Rule of Personal Account says, “Debit the Receiver, Credit the Giver”.
Since M/s Sharma is the Giver in this transaction, his Personal Account will be credited with Rs 10,00,000. Whereas, Machinery A/c would be debited with the same amount.
Thus, this transaction will be recorded in the respective accounts as follows:
| Machinery Account | |||
| M/s Sharma Account | |||
| Particulars (Dr) | Amount (in Rs) | Particulars (Cr) | Amount (in Rs) |
| To M/s Sharma | 10,00,000 | ||
| Particulars (Dr) | Amount (in Rs) | Particulars (Cr) | Amount (in Rs) |
| By Machinery | 10,00,000 |
2. Real Account
Real Accounts are the ones that are related to properties, assets, or possessions. These properties can be both physically existing as well as nonphysical in nature. Thus, Real Accounts can be of two types: Tangible Real Accounts and Intangible Real accounts.
a. Tangible Real Accounts
Tangible Real Accounts are accounts that have a physical existence. In other words, such assets can be seen, felt, or touched. For example Machinery A/c, Vehicle A/c, Building A/c, etc.
b. Intangible Real Accounts
These are the assets or possessions that do not have a physical existence but can be measured in terms of money. This means that such assets have some value attached to them.
For example, trademarks, patents, goodwill, copyrights etc.
Golden Rule Related To The Personal Account
Debit What Comes In, Credit What Goes Out
Illustration
Karan purchased a vehicle for his business worth Rs 5,00,000 in cash. So, this transaction involves two real accounts: A vehicle Account and Cash Account.
Thus, purchasing a Vehicle worth Rs 5,00,000 in cash means Vehicle is coming into the business. Whereas, Cash is going out of the business. The Golden Rule of Real Account says, “Debit What Comes in, Credit What Goes Out”.
Both Vehicle and Cash being Real Accounts, therefore, Vehicle A/c will be debited with Rs 5,00,000. Whereas, Cash A/c will be credited with the same amount.
Thus, this transaction will be recorded in the respective accounts as follows:
| Vehicle Account | |||
| Cash Account | |||
| Particulars (Dr) | Amount (in Rs) | Particulars (Cr) | Amount (in Rs) |
| To Cash | 5,00,000 | ||
| Particulars (Dr) | Amount (in Rs) | Particulars (Cr) | Amount (in Rs) |
| By Vehicle | 5,00,000 |
3. Nominal Account
Nominal Accounts relate to income, expenses, losses, or gains. These include Wages A/c, Salary A/c, and Rent A/c, etc.
Golden Rule Related To The Personal Account
Debit All Expenses and Losses, Credit All Incomes and Gains
Illustration
Karan paid wages worth Rs 1,00,000 in cash. So, this transaction involves two accounts: Nominal Account of Wages and Real Account of Cash.
Thus, paying wages worth Rs 1,00,000 in cash means wages are an expense to the business. And Cash is paid towards such an expense. Now Golden Rules pertaining to two accounts would apply in such a case. The Golden Rule of Nominal Account says, “Debit All Expenses and Losses, Credit All Incomes and Gains”.Whereas, Golden Rule of Real Account says, “Debit What Comes In, Credit What Goes Out”.
Thus, Wages A/c will be debited with Rs 1,00,000. Whereas, Cash A/c will be credited with the same amount.
Thus, this transaction will be recorded in the respective accounts as follows:
| Wages Account | |||
| Cash Account | |||
| Particulars (Dr) | Amount (in Rs) | Particulars (Cr) | Amount (in Rs) |
| To Cash | 1,00,000 | ||
| Particulars (Dr) | Amount (in Rs) | Particulars (Cr) | Amount (in Rs) |
| By Wages | 1,00,000 |
Example
Let’s consider the transactions taken in the above examples and apply these rules to see the dual accounts involved in every transaction.
1. Karan started a business with Rs 10,00,000.
Accounts Involved: Cash – Real Account, Karan’ Capital – Personal Account
Effect of Transaction: Cash (asset) increases by Rs 10,00,000 and Capital (liability) increases by Rs 10,00,000.
| Cash Account | |||
| Karan’s Capital Account | |||
| Particulars (Dr) | Amount (in Rs) | Particulars (Cr) | Amount (in Rs) |
| To Capital | 10,00,000 | ||
| Particulars (Dr) | Amount (in Rs) | Particulars (Cr) | Amount (in Rs) |
| By Cash | 10,00,000 |
2. Karan deposited Rs 9,60,000 in Bank of Baroda
| Bank Account | |||
| Particulars (Dr) | Amount (in Rs) | Particulars (Cr) | Amount (in Rs) |
| To Cash | 9,60,000 |
Accounts Involved: Cash – Real Account, Bank of Baroda – Personal Account
Effect of Transaction: Cash at Bank (asset) increases by Rs 9,60,000 and Cash (asset) decreases by Rs 9,60,000.
| Cash Account | |||
| Particulars (Dr) | Amount (in Rs) | Particulars (Cr) | Amount (in Rs) |
| By Bank | 9,60,000 |
3. Purchased Furniture worth Rs 6,00,000 and in return a cheque is issued on the same day
Accounts Involved: Bank – Real Account, Furniture – Real Account
Effect of Transaction: Furniture (asset) increases by Rs 6,00,000 and the Bank (asset) decreases by Rs 6,00,000.
| Furniture Account | |||
| Bank Account | |||
| Particulars (Dr) | Amount (in Rs) | Particulars (Cr) | Amount (in Rs) |
| To Bank | 6,00,000 | ||
| Particulars (Dr) | Amount (in Rs) | Particulars (Cr) | Amount (in Rs) |
| By Furniture | 6,00,000 |
4. Purchased Machinery for Rs 2,00,000 and an advance of Rs 30,000 is paid in cash to M/s Singhania
Accounts Involved: Machinery – Real Account, Cash – Real Account, Singhania – Personal Account
Effect of Transaction: Machinery (asset) increases by Rs 2,00,000, Cash (asset) decreases by Rs 30,000 and Creditors (liability) increases by Rs 1,70,000.
| Machinery Account | |||
| Cash Account | |||
| Particulars (Dr) | Amount (in Rs) | Particulars (Cr) | Amount (in Rs) |
| To M/s Singhania | 1,70,000 | ||
| To Cash | 30,000 | ||
| Particulars (Dr) | Amount (in Rs) | Particulars (Cr) | Amount (in Rs) |
| By Machinery | 30,000 |
| Singhania Account | |||
| Particulars (Dr) | Amount (in Rs) | Particulars (Cr) | Amount (in Rs) |
| By Machinery | 1,70,000 |
5. Goods bought from M/s Khanna worth Rs 70,000
Accounts Involved: Stock – Real Account, M/s Khanna – Personal Account
Effect of Transaction: Goods increase by Rs 70,000 and the Creditors (liability) increases by Rs 70,000.
| Stock Account | |||
| M/s Khanna Account | |||
| Particulars (Dr) | Amount (in Rs) | Particulars (Cr) | Amount (in Rs) |
| To M/s Khanna | 70,000 | ||
| Particulars (Dr) | Amount (in Rs) | Particulars (Cr) | Amount (in Rs) |
| By Stock | 70,000 |
6. Goods worth Rs 50,000 sold to Bector Enterprises for Rs 60,000
Accounts Involved: Stock – Real Account, Bector Enterprises – Personal Account, Karan’s Capital – Personal Account
Effect of Transaction: Debtors (asset) increased by Rs 60,000, Goods (asset) decrease by Rs 50,000, and Capital (Profit) increases by Rs 10,000.
| Stock Account | |||
| Bector Enterprises Account | |||
| Particulars (Dr) | Amount (in Rs) | Particulars (Cr) | Amount (in Rs) |
| By Bector Enterprises | 50,000 | ||
| Particulars (Dr) | Amount (in Rs) | Particulars (Cr) | Amount (in Rs) |
| To Stock | 50,000 | ||
| To Capital | 10,000 |
| Capital Account | |||
| Particulars (Dr) | Amount (in Rs) | Particulars (Cr) | Amount (in Rs) |
| By Bector Enterprises | 10,000 |