Basic Guidance On Accountancy

Understanding the fundamentals of accountancy is essential for anyone involved in business, finance, or bookkeeping. Every financial transaction in accounting is recorded under specific types of accounts, and knowing how to classify them correctly helps maintain accurate books of accounts.

Below is a simple and practical guide to the three main types of accounts in accounting, along with their rules for debit and credit.

Types of Accounts

1. Personal Account:

A Personal Account is related to individuals, organizations, or representative entities. These accounts record transactions with persons or entities.

There are three sub-types of personal accounts:

Natural (Real) Person Account – Refers to real human beings such as Ram’s A/c, Ravi’s A/c, or Kavita’s A/c.
Artificial Person Account – Refers to legally created entities such as a company, club, corporation, or institution (e.g., XYZ Ltd.’s A/c, Lions Club A/c).
Representative Personal Account – These represent persons indirectly, such as prepaid expenses, outstanding expenses, or accrued income (e.g., Prepaid Wages A/c, Outstanding Rent A/c).

In addition, Capital Account and Drawings Account are also considered personal accounts because they represent the owner of the business.

Rules of debit & credit:

- Debit the receiver
- Credit the giver

Example:

If cash is paid to Ram, then Ram (receiver) is debited and Cash (giver) is credited.

2. Real Account:

A Real Account relates to tangible and intangible assets of the business. These accounts represent what the business owns.

There are two types of real accounts:

Tangible Real Account – Physical assets that can be touched and seen, such as Building, Machinery, Furniture, Vehicles, Cash, etc.
Intangible Real Account – Non-physical assets that have value, such as Goodwill, Patents, Trademarks, Copyrights, etc.

Rules of debit & credit:

- Debit what comes in
- Credit what goes out

Example:

When new machinery is purchased, Machinery A/c (what comes in) is debited, and Cash A/c (what goes out) is credited.

3. Nominal a/c:

A Nominal Account records all expenses, losses, incomes, and gains. These accounts are temporary and get closed at the end of each accounting period by transferring their balances to the Profit and Loss Account.

They do not represent any real person or asset but only the nature of income or expense, such as Salary, Rent, Commission, Interest, Discount, etc.

Rules of debit & credit:

- Debit all expenses and loses
- Credit all incomes and gains.

Example:

If salary is paid, Salary A/c is debited (expense) and Cash A/c is credited (outflow).

Conversion of Nominal Accounts into Personal Accounts

Sometimes, a nominal account can take the nature of a personal account depending on the transaction type. This usually happens when there are prepaid or outstanding (accrued) items.

Below is a simple table showing such cases:

NOMINAL ACCOUNT	PERSONAL ACCOUNT
1. Salary Account	Prepaid Salary Account Outstanding Salary Account
2. Commission Account	Prepaid Commission Account Outstanding Commission Account
3. Interest Account	Prepaid Interest Account Approved Interest Account or Outstanding Interest Account
4. Rent Account	Prepaid Rent Account Outstanding Rent Account
5. Discount Account	Prepaid Discount Account Unexpired Discount Account
6. Premium Account	Outstanding Premium Account Premium Received In Advance Account