According to the double entry system of bookkeeping, there are three types of accounts that help you to maintain an error-free record of your journal entries. Each account type has a rule to identify its debit and credit aspect called as the Golden Rule of Accounting. The accounts are:
Personal Accounts
Ledger accounts that contain transactions related to individuals or other organizations with whom your business has direct transactions are known as personal accounts. Some examples of personal accounts are customers, vendors, salary accounts of employees, drawings and capital accounts of owners, etc.
The golden rule for personal accounts is: debit the receiver and credit the giver.
Example: Payment of salary to employees
In this example, the receiver is an employee and the giver will be the business. Hence, in the journal entry, the Employee’s Salary account will be debited and the Cash / Bank account will be credited.
Real Accounts
The ledger accounts which contain transactions related to the assets or liabilities of the business are called Real accounts. Accounts of both tangible and intangible nature fall under this category of accounts, i.e. Machinery, Buildings, Goodwill, Patent rights, etc. These account balances do not come to zero at the end of the financial year unless there is a sale of the asset or payment made towards a liability or closure or acquisition of the business. These accounts appear in the Balance Sheet and the balances get carried forward to the next financial year.
The golden rule for real accounts is: debit what comes in and credit what goes out.
Example: Payment made for a loan
In this transaction, cash goes out and the loan is settled. Hence, in the journal entry, the Loan account will be debited and the Bank account will be credited.
Nominal Accounts
Transactions related to income, expense, profit and loss are recorded under this category. These components actually do not exist in any physical form but they actually exist. For example, during the purchase and sale of goods, only two components directly get affected i.e money and stock. But, apart from this we may incur profit or loss out of such transactions and we might incur some expenses for these transactions to happen. These secondary components fall under the Nominal Category and the accounts that are in Profit and Loss statement are shown under this category.
The golden rule for nominal accounts is: debit all expenses and losses and credit all income and gains.
Example of Nominal Account: Shipping Charges account and Salary account.
FAQs
There are five main account type categories that all transactions can fall into on a standard COA. These are asset accounts, liability accounts, equity accounts, revenue accounts, and expense accounts. These categories are universal to all businesses.
What are the 7 types of accounting? ›
Here are the main types of accounting:
- Tax accounting.
- Financial accounting.
- Management accounting.
- Cost accounting.
- Forensic accounting.
- Governmental accounting.
- International accounting.
- Auditing.
There are three main types of accounts in accounting: real accounts, personal accounts, and nominal accounts. Real accounts include tangible and intangible assets. Personal accounts are classified as natural, artificial, or representative and relate to individuals or entities.
What is accounting 100 words? ›
The practise of recording a business's financial transactions is known as accounting. As part of the accounting process, these transactions are collated, reviewed, and reported to oversight organisations, regulatory agencies, and tax collection organisations.
What is the golden rule of accounting? ›
The three golden rules of accounting are (1) debit all expenses and losses, credit all incomes and gains, (2) debit the receiver, credit the giver, and (3) debit what comes in, credit what goes out.
What is the 5 major elements of accounting? ›
There are five elements of a financial statement: Assets, Liabilities, Equity, Income, and Expenses. Each of these categories has its own unique set of information that is important to track for a business.
What are basic accounting types? ›
Keep in mind that these Accounts and Sub-accounts should all fall into one of the five real account types (Asset accounts, Liability accounts, Expense accounts, Income accounts, and Equity accounts). As a business owner, it's essential that you understand the differences between these types of accounts.
How many classifications of accounts are there? ›
Personal accounts, real accounts, nominal accounts, and valuation accounts are the four types of accounts described by the traditional approach.
What are the golden words of accounting? ›
What are the Golden Rules of Accounting? 1) Debit what comes in - credit what goes out. 2) Credit the giver and Debit the Receiver. 3) Credit all income and debit all expenses.
How to understand accounts easily? ›
Here are some steps you can take to learn accounting by yourself:
- Learn how to read financial statements. ...
- Choose how you want to learn. ...
- Dedicate the time. ...
- Put your knowledge into practice. ...
- Consider getting accredited. ...
- Speak to accounting professionals.
The most important 7 accounting functions are payroll, inventory cost management, reporting financial statements, legal compliance and finance controls, cash collections and record keeping, and accounts payable and receivables.
What are these 5 accounts in order? ›
Key Takeaways: The 5 primary account categories are assets, liabilities, equity, expenses, and income (revenue)
What are the 5 key of accounting? ›
Although the guidelines for accountants are extensive, there are five main principles that underpin accounting practices and the preparation of financial statements. These are the accrual principle, the matching principle, the historic cost principle, the conservatism principle and the principle of substance over form.
What are 10 examples of personal accounts? ›
For example: a capital account of an individual or business, creditors account, debtors account, drawings account, salary payable account, accounts receivable and accounts payable, etc.
What are 10 examples of nominal accounts? ›
Examples of nominal accounts are service revenue, sales revenue, wages expense, utilities expense, supplies expense, and interest expense.
