Types of Accounts in Accounting

Financial Accounting has its origin in the ‘Principle of Duality’. This principle says that each and every business transaction that is written in accounts books has an effect that is twofold. In other words, every transaction has to involve at least 2 accounts while being recorded in account books.

For example, Shaw Pvt. Ltd. buys 5,000 units of raw material worth Rs 5 lakhs for its business. In this transaction, Shaw Pvt. Ltd. is receiving raw materials in exchange for cash worth Rs 5 Lakhs. To put it otherwise, raw material is coming into the business whereas cash worth Rs 5 lakh is going out of the business.

Hence, it results in a transaction that affects the raw material’s stock increasing the same by 5,000 units. At the same time, it also affects the cash available to the business, thereby reducing it by Rs 5 lakh. This is what is termed the ‘Double Entry System’ of accounting which is usually followed while preparing the account books of a business. So it is seen that the ‘Dual Accounting Concept’ states that each business transaction has an equal and at the same time opposite effect in the minimum of two different accounts.

What is an Account?

An account is a detailed outline of the transactions that are carried out by a specific business in respect of a particular person or a firm or their representatives or objects.

For example, when a business carries out transactions with customers and suppliers, both suppliers, as well as customers, are termed separate accounts.

Similarly, businesses sometimes purchase tangible items like land, machinery, plant, building, etc., and each of the tangibles is treated as an individual account though such types of accounts are related to things.

Therefore, whenever a business carries out transactions, it has to mark the accounts involved and identify them. The next step to be followed then is applying the necessary accounting standards and golden accounting rules to keep a record of such transactions. Furthermore, an account is typically recorded in a T-Format. A T-Account has two sides to it. The debit side is the name given to the left side of an account whereas the right side is called the credit side.

Types of Accounts

The different types of accounts are as follows:-

• Personal Account
  • Personal Representative Account
  • Personal Artificial Account
  • Personal Natural Account
• Real Account
  • Real Intangible Account
  • Real Tangible Account
• Nominal Account

A Real Account can also be called a general ledger account that relates to assets and liabilities other than people accounts. These accounts are accounts that don’t need to be closed at the end of the financial year because they are carried forward to the next year. A simple example of a real account is a bank account.

A personal account can be called a general ledger account that is connected to all persons or people like individuals, different firms, or associations. A creditor account is an example of a personal account. A nominal account is a general ledger account that keeps a record of all income and expenditure, gains and losses. A simple example of a nominal account is an interest account.

1. Personal Account

As stated earlier, personal accounts are those accounts that are related to an individual, a company, a firm or a group of associations, etc. These persons might incorporate natural persons, artificial persons, or representative persons, as the case may be.

For example – Manoj and Saroj Trading Co., Charitable Trusts, ABC Bank Ltd, X company Ltd., etc.

There are some accounts that might come under the category of personal representative accounts.

For instance – When we speak of salary, it means how much amount is payable to each of the employees. But all salary accounts are clubbed collectively under an account called ‘salary payable A/c’.

The rule for this Account

• The receiver is debited
• The Giver is credited.

Type of Personal Accounts

a. Natural Persons

These types of accounts are related to individuals or natural persons like Ranveer’s A/c, Aryan’s A/c, Ritwik’s A/c, etc.

b. Artificial Accounts

These accounts are related to various companies and institutions like Roy Brothers Pvt Ltd A/c, Lion’s Club A/c, etc. Thus, such types of institutions and companies are those entities that are there in the eyes of law.

c. Representative Accounts

Accounts that represent a specific purpose of work are called representative accounts. For instance, Outstanding Wages A/c, Outstanding Interest A/c, Prepaid Expense A/c, etc.

The golden rule that is related to the personal account is:

1. The receiver is debited,

2. The giver is credited.

Illustration

Siddharth bought some machinery from M/s Surana & Sons worth Rs 10,00,000/- on credit. So we see that this particular transaction affects two accounts: first, the Personal Account of M/s Surana & Sons and the Machinery Account. Thus, this transaction implies that Siddharth has purchased the Machinery from M/s Surana & Sons for his business. The Golden Rule of Personal Account states, “Debit the Receiver, Credit the Giver”.

As in this transaction, M/s Surana & Sons is the Giver, his Personal Account shall be credited with Rs 10,00,000. On the other hand Machinery, A/c shall be debited with the same sim of money. Therefore, this particular transaction is being recorded in the following manner in the respective accounts:

2. Real Account

Real Accounts are those accounts that relate to assets, properties, or possessions. These related properties might exist in physical or non-physical forms. This gives rise to the need for the creation of two types of real accounts:

Intangible Real Accounts and Tangible Real Accounts.

a. Tangible Real Accounts

The term tangible real accounts suggest those accounts that are physical in nature. In other words, these assets are visible to the eyes. Such assets can be touched, seen, or felt. For instance, Building A/c, Vehicle A/c, Machinery A/c, etc.

b. Intangible Real Accounts

This type of account suggests those accounts that relate to assets or possessions that are non-physical in nature. In other words, these assets cannot be seen, felt, or touched but can be measured in terms of some amount of money. One can say that some value is attached to these types of assets.

For example, goodwill, patent, trademarks, copyrights, etc.

Golden Rule relating to this type of personal account:

• What comes in is to be debited
• What goes out is to be credited

Illustration

Siddharth bought a vehicle for the purpose of his business which is worth Rs 5,00,000 in cash. So, this type of transaction involves two real accounts: A vehicle Account and Cash Account.

Hence, buying a vehicle worth Rs 5,00,000 in cash implies that a vehicle is being added to the business. At the same time, cash is going out of the business. Therefore, the golden rule of real accounts states, “Debit What Comes in, Credit What Goes Out”.

Both cash and vehicle are real accounts, hence, Rs 5,00,000 will be debited to vehicle A/c. But the same sum will be credited to cash A/c.

So the following table shows the transaction thus recorded:

3. Nominal Account

Nominal accounts are those types of accounts that are related to any form of income or expenditure, gain or loss. For example Rent A/c, Salary A/c, Wages A/c, etc.

The golden rule for such accounts:

• All types of expenditures and losses relating to the business are to be debited.
• All forms of income of business and gains, if any are to be credited.

For Example – Whenever any salary is given to employees of the business entity salary A/c is debited or whenever any other expenses are incurred it is debited. On the contrary, when the business gets any discount, interest, etc these are credited whenever received by the business entity.

In addition, there are some other types of accounts in accounting that are as follows :

• Cash Account – This type of account keeps records of payments that are done by cash, deposits, and withdrawals.
• Income Account – This type of account is to keep a track of all types of income sources of business.
• Expense Account – This type of account records all the expenditures of the business.
• Liabilities – This type of account takes care of any form of debt or loan under liabilities.
• Equities – If there exists any form of investment of the account owner or investment of common stocks, or retained earnings then such entries will fall under the account type equities.

All transactions of a business entity should be recorded in account books. To record these transactions the business entity should pass journal entries which will be then entered into ledgers. The journal entries are passed according to the Golden Rules of Accounting. In order to apply these rules, the type of account is to be ascertained first and then these rules are applied thereafter:

• Debit is something that comes in, credit is something that goes out
• The receiver is to be debited, the giver is to credit
• All expenses are to be debited and all income is to be credited

So in this way, the foundation of accounting is laid. Above mentioned rules are known as the Golden Rules of accounting. These rules are just like the letters of the English alphabet. For instance, one can write in English only if he knows how to write the English alphabet. Similarly for accounting, if one does not have knowledge of the above-mentioned golden rules, one will not be able to pass journal entries and therefore will not be able to account accurately for the transactions.

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