The different types of accounts : The golden rules of Accounting, What is the concept of Debit(dr) and Credit (cr)?

In the world of accounting, understanding the various types of accounts is crucial for managing finances effectively. Accounts are like the building blocks of financial records, organizing transactions into meaningful categories. There are two broad categories of accounts: personal and impersonal. Let's delve deeper into each type:

Types of accounts : Personal A/C, Nominal A/C, Real A/C

The different types of accounts The golden rules of Accounting


1 ) Personal Accounts:

Personal accounts deal with individuals, groups, or entities involved in business transactions.

Natural Person's Account:

This category includes accounts related to real, living individuals. For instance, if Sachin conducts business with a company, his account would be labeled "Sachin’s A/c." Similarly, accounts for Kajal, Jyoti, or any other individual would fall under this category. These accounts help track transactions with specific people, making it easier to manage relationships and debts.

Artificial Person's Account:

Unlike natural persons, artificial persons refer to organizations or entities created by law, such as companies, corporations, or clubs. Accounts like "Bank of Maharashtra A/c" or "Parekh associates & Co A/c" fall under this category. These accounts represent businesses or groups rather than individuals and are vital for recording transactions with corporate entities.

Representative Personal Account:

Representative personal accounts stand in for specific individuals or groups in business dealings. For example, "Outstanding Rent A/c" tracks rent owed by tenants, while "Prepaid Wages A/c" records wages paid in advance to employees. These accounts help manage outstanding payments and prepaid expenses efficiently.

Impersonal Account:

In contrast to personal accounts, impersonal accounts do not identify particular individuals but rather encompass various financial dealings of a business.


2) Real Accounts:

Real accounts deal with assets and properties owned by the business. They can be further divided into tangible and intangible real accounts:

Tangible Real Account: These accounts represent physical assets that can be seen, touched, or felt, such as machinery, vehicles, or inventory. E.g. Machinery A/c or Motor Car A/c.

Intangible Real Account: Intangible real accounts represent assets that cannot be physically touched but hold value, such as goodwill, patents, or trademarks. E.g. , Copyright A/c,  Goodwill , Patents , Trademark , etc.


3) Nominal Accounts:

Nominal accounts track expenses, losses, income, and gains incurred by the business. They provide insights into the financial performance of the company and help in assessing profitability. E.g. Wages A/c, Stationery A/c, Salary A/c, Depreciation A/c Commission Received A/c, Discount Received A/c etc.

In accounting, the concepts of debit and credit serve as fundamental pillars for recording financial transactions accurately.

Debit (Dr.): 

Debit represents the left-hand side of an account ledger. When a transaction occurs, if an asset account is debited, it increases the balance of that account. Conversely, if a liability or equity account is debited, it decreases the balance. Debit entries typically denote an increase in assets, expenses, and losses, or a decrease in liabilities, revenues, and gains. For example, when a company purchases inventory for cash, it debits the inventory account to reflect the increase in assets.

Credit (Cr): 

Credit denotes the right-hand side of an account ledger. When a transaction occurs, crediting an account typically indicates a decrease in assets, expenses, or losses, or an increase in liabilities, revenues, and gains. For instance, when a customer pays off their accounts payable, the company credits the accounts payable account to reduce the liability.


What is Golden Rules of Accounting?

The Golden rules of Accounting. (Debit and Credit)

Personal Accounts:

Debit the receiver: Increase the receiver's account with a debit entry.

Credit the giver: Decrease the giver's account with a credit entry.

Real Accounts:

Debit what comes in: Record increases in assets with a debit entry.

Credit what goes out: Record decreases in assets with a credit entry.

Nominal Accounts:

Debit all expenses and losses: Record expenses and losses with debit entries.

Credit all incomes and gains: Record incomes and gains with credit entries.

The golden rules of accounting provide a fundamental framework for accurately recording financial transactions in double-entry bookkeeping. They categorize accounts into three main types: Personal, Real, and Nominal.

Read Also: What is a Ledger? Importance of Ledger and How to create Ledgers in Tally Prime?

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Sachin Chopade
I am a Finance and Tax Analyst, Content Creator, sharing valuable articles and calculators related to Finance, Accounting and Banking industry.