RULES OF JOURNALISING
WHAT IS AN ACCOUNT?
An account is a record of all business transactions relating to a particular person or item. In
accounting we keep a separate record of each individual, asset, liability, expense or income.
The place where such account is maintained is termed as an ‘Account’.
All accounts are divided into two sides. The left side of an account is called Debit side and the
right side of an account is called Credit side.
CLASSIFICATION OF ACCOUNTS
The accounts can be classified into personal accounts and impersonal accounts. Impersonal
account is further divided into Real and Nominal account.
Classification of accounts
Personal Impersonal
Accounts Acoounts
Real Account Nominal Account
1. Personal Accounts:- The accounts which relate to an individual, firm, company or an
institution are called Personal accounts. E.g. Account of Mohan, Account of Ram
Chandra, Account of D.C.M Limited, Bank Account, Capital Account, Drawings Account
of the proprietor etc. are called personal account.
Rule: Debit the receiver and Credit the giver’’. In other words, ‘Debit that person’s
account who receives something from the business and Credit that person’s accounts
who gives something from the business.
Example 1 : Paid ₹ 1,000 to Hari
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Hari A/c (Debit the receiver) Dr. 1,000
To Cash A/c 1,000
Example 2: Received ₹ 500 from Mohan
Cash A/c Dr. 500
To Mohan (Credit the Giver) 500
Object:- Object of preparing personal account is to ascertain as to how much amount of
personal account owes to the business i.e. how much amount is due to be received from
him and how much amount is payable to him.
Personal account can be classified into the following three categories:-
Natural personal account- Accounts of ‘natural persons’ means the accounts of
human beings. For example- Mohan A/c, Sohan’s A/c etc.
Artificial Personal Account- These accounts do not have physical existence as
human beings but they work as personal accounts. For example, any Firm’s A/c,
any limited company’s A/c, any bank’s A/c etc.
Representative personal account- When an account represents a particular
person or a group of persons, it is termed as a representative account. For
example- ‘Outstanding Salaries A/c’, ‘prepaid insurance A/c’, accrued interest
A/c etc.
2. Real Account:- The accounts of all those things whose value can be measured in terms
of money and which are the properties of the business are termed as Real Accounts.
Such as Cash A/c, furniture A/c, Machinery A/c, Building A/c, Goodwill A/c etc.
Rule:- Rule for recording a transaction in Real account is ‘Debit what comes in and
Credit what goes out’.
According to this rule, whenever any property comes into the business, it is debited and
when it goes outside the business, it is credited.
For example, if furniture for ₹ 5,000 has been purchased for cash, furniture account
should be debited according to the rule of “Debit what comes in”, while cash account
should be credited according to the rule of “Credit what goes out”. Entry will be:-
Furniture A/c (Debit what comes in) Dr. 5,000
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To cash A/c (Credit what goes out) 5,000
Object:- These accounts represent the value of various properties owned by a business
in terms of money and indicate the financial position of the business.
Real account can be classified in to two categories:
Tangible Real Account- Tangible real accounts are those which can be touched,
felt, measured, purchased, sold etc. For e.g. Cash A/c, stock A/c, Furniture A/c
etc.
Intangible Real Account- These accounts represents such things which cannot
be touched, but can be measured in terms of money. For e.g. Goodwill A/c,
Patents A/c etc.
3. Nominal Account:- These accounts include the account of all expenses and incomes.
The examples of nominal accounts relating to expenses are Salaries paid, Rent paid,
discount Allowed, Bad Debts etc.
The examples of nominal accounts relating to incomes are Commission received,
Interest received, Discount received etc.
Rule:- Rule for recording in nominal accounts is, “ Debit the expenses and losses and
Credit incomes and gains”.
Example 1: - Paid ` 5,000 for salaries. Salaries represent expenses and as such, Salaries
Account will be debited according to the rule of “Debit the expenses”. On the other
hand cash Account will be credited according to the rule of”Credit what goes out”.
Entry will be:-
Salary A/c (Debit the expenses) Dr. 5,000
To Cash A/c (Credit what goes out) 5,000
Example 2:- Received ` 1,000 for Commission. Commission A/c represents Nominal
Account. Therefore, Commission A/c will be credited according to the rule of “Credit the
incomes”. Cash A/c is a real account and as Cash is coming in, and cash a/c will be
debited according to the rule of “Debit what comes in”. Entry will be:
Cash A/c (Debit what comes in) Dr. 1,000
To Commission A/c( Credit all incomes) 1,000
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Object:- Nominal accounts are those accounts which are in name only and which do not
really exist. These accounts are opened simply to explain the nature of head for which
cash has been paid. Nominal accounts provide information regarding the following:-
Amount spent on various heads in a particular period
Income received on various heads in a particular period
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