CLASSIFICATION OF ACCOUNTS

Accounting is the language of business. The affairs and the results of the business are communicated to others through accounting information, which has to be systematically recorded and presented.

CLASSIFICATION OF ACCOUNTS

Every business deal with other “Person”, possesses “Assets”, pay “Expenses” and receive “Income”.

So from the above, we can see every business has to keep

• An account for each person

• An account for each asset and

• An account for each expense or income.

CLASSIFICATION OF ACCOUNTS

• Accounts in the names of persons are known as “Personal Accounts”

• Accounts in the names of assets are known as “Real Accounts”

• Accounts in respect of expenses and incomes are known as “Nominal Accounts”

CLASSIFICATION OF ACCOUNTS

ACCOUNTS

PERSONALACCOUNTS

IMPERSONALACCOUNTS

REALACCOUNTS

NOMINALACCOUNTS

PERSONAL ACCOUNTS

Accounts in the name of persons are known as personal accounts.

Eg: Babu A/C,

Babu & Co. A/C,

Outstanding Salaries A/C, etc.

REAL ACCOUNTS

These are accounts of assets or properties. Assets may be tangible or intangible. Real accounts are impersonal which are tangible or intangible in nature.

Eg:- Cash a/c, Building a/c, etc are Real Accounts related to things which we

can feel, see and touch.

Goodwill a/c, Patent a/c, etc Real Accounts which are of intangible in nature.

NOMINAL ACCOUNTS

These accounts are impersonal, but invisible and intangible. Nominal accounts are related to those things which we can feel, but can not see and touch. All “expenses and losses” and all “incomes and gains” fall in this category.

Eg:- Salaries A/C, Rent A/C, Wages A/C, Interest Received A/C, Commission Received A/C, Discount A/C, etc.

DEBIT AND CREDIT

Each accounts have two sides – the left side

and the right side. In accounting, the left

side of an account is called the “Debit Side”

and the right side of an account is called the

“Credit Side”. The entries made on the left

side of an account is called a “Debit Entry”

and the entries made on the right side of an

account is called a “Credit Entry”.

RULES FOR DEBIT AND CREDIT

Personal Personal AccountAccount

Debit the ReceiverDebit the Receiver

Credit the GiverCredit the Giver

Real AccountsReal Accounts Debit what comes inDebit what comes in

Credit what goes Credit what goes outout

Nominal Nominal AccountsAccounts

Debit all Expenses Debit all Expenses and Lossesand Losses

Credit all Incomes Credit all Incomes and Gainsand Gains

Steps for finding the debit and credit aspects of a particular transaction

• Find out the two accounts involved in the

transaction.

• Check whether it belongs to Personal,

Real or Nominal account.

• Apply the debit and credit rules for the

two accounts.

Exercise

• Purchased a Building for Rs.20,000/-.

• Paid Cash Rs.1,000/- to Satheesh.

• Paid Salary Rs.1000/-.

• Received Commission Rs.250/-.

• Sold goods for Cash Rs.3500/-.

Subsidiary Books

• General Journal• Special Journals

• Purchase Book• Sales Book• Purchase Return Book• Sales Return Book• Bills Receivable Book• Bills Payable Book• Cash Book• Petty Cash Book

Journal

Journal is the prime or original book of entry in which all transactions are recorded in the form of entries. Journalising is an act of recording or entering transactions in a Journal in the order of date.DateDate ParticularsParticulars LFLF DebitDebit

AmountAmountCredit Credit

AmountAmount

Journal Entry

Jan 1, 1981 Prakash Started a business Rs. 15,000/-DateDate ParticularsParticulars LFLF DebitDebit

AmountAmountCredit Credit

AmountAmount

19811981

Jan 1Jan 1Cash a/c Cash a/c Dr.Dr.

To Prakash’s Capital To Prakash’s Capital a/ca/c

(Being cash invetsed to (Being cash invetsed to business)business)

15,00015,000

15,00015,000