In accounting, every business transaction affects one or more accounts. To record these transactions correctly, accounts are classified into different categories. Traditionally, accounts are divided into three main types: Personal Account, Real Account, and Nominal Account.
Understanding these types of accounts is very important because it helps an accountant decide which account should be debited and which account should be credited.
Classification of accounts makes the recording of financial transactions systematic and easy to understand. It helps accountants apply the correct debit and credit rules while preparing journal entries.
The classification of accounts helps in:
A Personal Account is an account related to a person, group of persons, or an organization.
Personal accounts can include individuals, companies, firms, banks, institutions, and other organizations with whom the business has financial transactions.
“Debit the Receiver, Credit the Giver.”
This means that when a person or entity receives something from the business, their account is debited. When a person or entity gives something to the business, their account is credited.
Suppose a business pays ₹10,000 to Rahul.
Here, Rahul is the receiver of money.
Therefore:
Rahul’s Account → Debit ₹10,000
Cash Account → Credit ₹10,000
A Real Account is related to the assets and properties of a business. These accounts represent things that the business owns.
Real Accounts are generally divided into Tangible Real Accounts and Intangible Real Accounts.
These are assets that can be physically seen or touched.
Examples include:
These are assets that do not have a physical form but have financial value.
Examples include:
“Debit What Comes In, Credit What Goes Out.”
When an asset comes into the business, the asset account is debited. When an asset goes out of the business, the asset account is credited.
Suppose a business purchases furniture for ₹20,000 in cash.
Furniture comes into the business, so:
Furniture Account → Debit ₹20,000
Cash goes out of the business, so:
Cash Account → Credit ₹20,000
A Nominal Account is related to expenses, losses, incomes, and gains of a business.
These accounts are mainly used to determine the profit or loss of the business for an accounting period.
Expenses:
Losses:
Incomes and Gains:
“Debit All Expenses and Losses, Credit All Incomes and Gains.”
This means that expenses and losses are debited, while incomes and gains are credited.
Suppose a business pays ₹15,000 as office rent.
Rent is an expense, so:
Rent Account → Debit ₹15,000
Cash goes out of the business, so:
Cash Account → Credit ₹15,000
The three traditional golden rules can be summarized as follows:
| Type of Account | Golden Rule |
|---|---|
| Personal Account | Debit the Receiver, Credit the Giver |
| Real Account | Debit What Comes In, Credit What Goes Out |
| Nominal Account | Debit All Expenses and Losses, Credit All Incomes and Gains |
These three rules help accountants determine the correct debit and credit treatment for business transactions.
Debit (Dr.) and Credit (Cr.) are the two sides of an accounting entry.
Debit does not always mean an increase, and credit does not always mean a decrease. Their effect depends on the type of account involved.
For example:
A business receives ₹25,000 from a customer.
Accounts involved:
Cash comes into the business → Debit Cash Account
The customer’s account is credited because the customer is the giver of money.
Journal Entry:
Cash A/c Dr. ₹25,000
To Customer’s A/c ₹25,000
A business purchases machinery for ₹1,00,000 in cash.
Machinery comes into the business → Debit Machinery Account
Cash goes out → Credit Cash Account
Journal Entry:
Machinery A/c Dr. ₹1,00,000
To Cash A/c ₹1,00,000
A business pays ₹30,000 as salary.
Salary is an expense → Debit Salary Account
Cash goes out → Credit Cash Account
Journal Entry:
Salary A/c Dr. ₹30,000
To Cash A/c ₹30,000
A business receives ₹5,000 as commission.
Cash comes into the business → Debit Cash Account
Commission is an income → Credit Commission Received Account
Journal Entry:
Cash A/c Dr. ₹5,000
To Commission Received A/c ₹5,000
Remember the three golden rules:
Debit the Receiver
Credit the Giver
Debit What Comes In
Credit What Goes Out
Debit All Expenses and Losses
Credit All Incomes and Gains
These golden rules form the foundation of journal entries and double-entry bookkeeping. Once you understand these rules, recording day-to-day business transactions becomes much easier.
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