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
- Real Accounts
- Nominal Accounts
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 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 are the 7 types of accounting? ›
What are the different types of accounting?
- Tax accounting.
- Financial accounting.
- Management accounting.
- Cost accounting.
- Forensic accounting.
- Governmental accounting.
- International accounting.
- Auditing.
This dictionary is essential for students and professionals in accounting and finance, and an ideal source of reference for anyone seeking a clear guide to the often-confusing world of accountancy terms.
What are the 8 types of accounting? ›
What are the types of accounting?
- Financial.
- Management.
- Tax, government.
- Forensic.
- Public accounting.
- Accounting information systems.
- Auditing.
Accounts are classified in accounting using one of two methods: the current approach or the classic approach. The accounts are classified as asset accounts, liability accounts, capital or owner's equity accounts, withdrawal accounts, revenue/income accounts, and expense accounts, according to the modern approach.
What is the golden rule in 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. These rules are the basis of double-entry accounting, first attributed to Luca Pacioli.
How to learn accounts easily? ›
Step-by-Step Guide
- Step 1: Understanding the Accounting Equation. ...
- Step 2: Familiarize Yourself with Financial Statements. ...
- Step 3: Learning to Record Business Transactions. ...
- Step 4: Posting Journal Entries to the Ledger. ...
- Step 5: Prepare the Trial Balance. ...
- Step 6: Make Adjusting Entries. ...
- Step 7: Prepare Financial Statements.
I know I have seen jobs posted that pay $50K, and K is meant to stand in for a thousand. And you would be correct, thanks to the Greeks. K comes from the Greek word kilo which means a thousand. The Greeks would likewise show million as M, short for Mega.
What are the 10 types of accounting cycle? ›
The ten steps are analyzing transactions, journalizing transactions, post transactions, preparing an unadjusted trial balance, preparing adjusting entries, preparing the adjusted trial balance, preparing financial statements, preparing closing entries, posting a closing trial balance, and recording reversing entries.
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.
What are the four basic accounting? ›
Typically, you'll need all four: the income statement, the balance sheet, the statement of cash flow, and the statement of owner equity. By preparing these four accounting financial statements, you will be able to see how well your company's finances are doing or find areas that need improvement.
What is accounting free dictionary? ›
accounting (usually uncountable, plural accountings) (business) The development and use of a system for recording and analyzing the financial transactions and financial status of an individual or a business. A relaying of events; justification of actions. He was required to give a thorough accounting of his time.
Is there a financial dictionary? ›
In place of cryptic definitions that are often more intimidating than the words themselves, the Dictionary of Financial Terms provides truly helpful explanations of over 700 of the most commonly used, and most commonly misunderstood financial terms, using examples, illustrations, and complementary graphics to make the ...
What is accounting in one word answer? ›
What Is Accounting? Accounting is the process of recording financial transactions pertaining to a business. The accounting process includes summarizing, analyzing, and reporting these transactions to oversight agencies, regulators, and tax collection entities.
What are 10 examples of personal accounts? ›
20 Examples Of Personal Account Are:-
- Savings Account.
- Checking Account.
- Credit Card Account.
- Mortgage Loan Account.
- Car Loan Account.
- Student Loan Account.
- Personal Loan Account.
- Investment Account.
We have 5 basic categories for accounts:
- Asset: Something a business has or owns.
- Liability: Something we owe to a non-owner.
- Equity: Something we owe to the owners or the value of the investment to the owner.
- Revenue: Value of the goods we have sold or the services we have performed.
- Expenses: Costs of doing business.
There are four basic principles of financial accounting measurement: (1) objectivity, (2) matching, (3) revenue recognition, and (4) consistency. 3. A special method, called the equity method, is used to value certain long-term equity investments on the balance sheet.
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.
