In the traditional or conventional approach of accounting, the rules of ‘Debit and Credit’ were different and accounts were classified in different ways as personal, real and nominal. This classification and rules are discussed below-
Classification of Accounts > 1. Impersonal Accounts > A. Real Accounts > 1. Tangible Real Accounts 2. Intangible Real Accounts
B. Nominal Accounts ((Revenue and Expenses Accounts) (Temporary Accounts))
2. Personal Accounts > A. Natural Personal A/C B. Artificial Personal A/c C. Representative
Personal A/c
The meaning of Account:
An account can be defined as the presentation of all information related to the financial transactions of an organization. It is always written systematically under one heading for different subheads that highlight the nature of the information.
Personal Accounts:
Personal accounts are classified into natural and artificial accounts. In this context, natural accounts represent to human beings like John, Jack, James and David. In the same manner, the artificial accounts represent the account that is related to companies or firms or institutions such as Michael & Bros Account, Bata Shoe Company’s Account, Sporting Club’s Account, Creditor’s Account, Debtors Account, Gupta & Sons Account, etc.
Similarly, representative personal accounts represent a group of persons like Outstanding Wages Account. In this context, the representative personal accounts represent workers and other wages that are payable such as Prepaid Salaries, Outstanding Salaries, etc.
Rules of Debit and Credit
Personal accounts show the receiving and giving of financial requirements of the business. These accounts are termed as are ceiver when goods and services are sold or amounts are paid. Similarly, these accounts are termed as giver when goods are purchased or amounts are received. According to this nature of personal account, it can be represented as per the rule as follows-
Debit the receiver
Credit the giver
For example, a company sells goods to Kunal. Here, Kunal is the personal account as it is the name of human being. These goods are received by Kunal so it will be debited in the entry as are ceiver. In this same manner, suppose certain goods are purchased from Kishore, he is the giver. In this context, he will be credited in the entry as giver.
Bank Ale deposits money from different customers. In this scenario, the bank will be represented as the receiver. Similarly, if the amount is withdrawn from the Bank, then it is the giver. In this scenario, the bank will be represented as the giver.
This suggests that we have to identify whether the personal account is natural or artificial. After proper verification, it will be represented whether it is the giver or receiver.
Transactions
- Goods sold to Kunal for $10,000
This means-
Kunal A/c Dr. 10,000
To Sales A/c 10,000
(Because goods are sold to Kunal)
Note:
As per the rule, Kunal’s A/c will be debited and represented as ‘Receiver’.
- Goods that are purchased from Kishore for $8,000
Purchase A/c Dr. 8,000
To Kishore A/c 8,000
(Because goods are purchased from Kishore)
Note:
As per the rules, Kishore’s A/c will be credited and represented as ‘Giver’
- Amount deposited into Bank $20,000
Bank A/c Dr. 20,000
To Cash Ale 20,000
(Because the amount has deposited into bank)
Note:
As per the rules, the Bank Ale will be debited and represented as ‘Receiver’
- Amount withdrawn from Bank $4,000
Cash A/c Dr. 4,000
To Bank A/c 4,000
(Because the amount has withdrawn from bank)
Note:
As per the rules, the Bank Ale will be credited and represented as ‘Giver’
Moreover, the following rule will be considered in Personal Accounts-
Debit the debtor
Credit the creditor
Sometimes it has been found that traditional rule of debit and credit of personal accounts proves to be incorrect. It is then recommended to have the knowledge of Modern American Accounting Approach for debit and credit. Here, the rule of debiting is applied for Debtor and rule of crediting is applied for Creditor.
Suppose the Outstanding Salary A/c has been created for paying the salary amount to the employees. This suggested that amount will be paid by the company, so the employees are the creditors and this data will be represented for crediting. Similarly, the Prepaid Expenses represent to pay the amount in advance. So, it is debited and will come under debtor.
For Example:
Transactions
- Goods that are sold to Vijay for cash $10,000
Cash A/c Dr. 10,000
To Sales A/c 10,000
(Because the goods are sold to Vijay for cash)
Note:
As per the rules of modern approach (American Approach), Vijay’s A/c will not be debited. This is because he has received goods, so he is not the debtor.
- Goods that are purchased from Fernandes for cash $8,000
Purchase A/c Dr. 8,000
To Cash A/c 8,000
(Because goods are purchased from Fernandes for cash)
Note:
As per the rules of modern approach, Fernandes’s A/c will not be credited. This is because he has purchased so he is not the creditor.
You should know that if any suffix or prefix such as ‘due’,‘unpaid’,‘outstanding’,‘owing’,unexpired’,‘prepaid’,‘accrued’, unearned, etc. are added to the nominal account, then it will be treated as ‘Personal Account’. For example- unearned rent Ale, Accrued A/c, wages owing A/c and unexpired insurance.
Impersonal Accounts
All the other accounts excluding personal account is termed as impersonal account. It is related to expenses, losses, income, assets and gains. This account can be classified into two categories i.e. Real Account and Nominal Account.
Real Account:
This account is again subdivided into two-
- Tangible Real Account:
It is related to the property. In other words, real tangible account holds those transactions which are exist in real and can be touched physically. Thus, real accounts include Building A/c, Furniture A/c, Plant A/c, Goods A/c, Cash A/c, Machinery A/c, etc.
- Intangible Real Account:
These real accounts are called intangible because they do not have any physical shape, size or structure. No one can touch physically. For example, Trademark, Goodwill is considered as intangible real accounts.
Rules of Debit and Credit
Real accounts are for non-living objects or lifeless properties. These items either can be purchased or sold by the business organization. This means either it comes into the business or goes out of the business. In this scenario, the rules of debit and credit will be represented as-
Debit what comes in
Credit what goes out
As per this rule, when the business owned any particular property, it will be debited. In the same manner, when it goes out of the business firm, it will be credited. Thus, if any organization purchases furniture on cash, the furniture enters in the firm. This means the furniture A/c will be credited.
For Examples:
Transactions
- Furniture is purchased for cash $15,000
Furniture A/c Dr. 15,000
To Cash A/c 15,000
(Because the furniture is purchased for cash)
Note:
As per the rules, furniture A/c will be debited.
- Machinery that are sold for $5,000
Cash A/c Dr. 5,000
To Machinery A/c 5,000
(Because this amount has received for the sale of machinery)
Note:
As per the rule, cash A/c will be debited and Machinery A/c will be credited.
Nominal Account:
The nominal account is just the opposite of real account. These accounts are related to the Gain and Losses or Income and Expenditure or Salaries A/c or Rent A/c or Wages A/c or Interest A/c or Advertisement A/c or Discount A/c, etc.
It is also known as the Revenue and Expenses Account. Nominal Accounts are called as Temporary Account, especially in America. This is because it gets closed after the operations are done accordingly by transferring the data to Profit and Loss A/c.
Rules of Debit and Credit:
According to its nature, nominal accounts have the following rule-
Debit all expenses or losses
Credit all incomes or gains
As per this rule, the wage A/c, Salary A/c, etc. is met when the Commission A/c, interest A/c, etc. are credited. If the payment is done to the workers, then it will be considered as debited. In the same manner, the rent from tenant will be credited as it is again to landlords.
For Example:
Transactions:
- Salaries that are paid $25,000
Salaries A/c Dr. 25,000
To Cash A/c 25,000
(Because salaries are paid)
Note:
As per the rule, salaries A/c will be debited.
- Rent are received $5,000
Cash A/c Dr. 5,000
To Rent A/c 5,000
(Because the rent is received)
Note:
As per the rule, the Cash A/c is credited.
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Links of Next Accounting Topics:-
- Subsidiary books or sub division of journal
- Balancing of ledger accounts
- Meaning of trial balance
- Balance sheet in final accounts without adjustments
- Adjustments additional information in preparation of final accounts
- Meaning of bank reconciliation statements
- Bills of exchange concept of bills of exchange
- Errors affecting or disclosed by trial balance introducing the concept
- Meaning of depreciation
