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 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 is accounting terminology glossary? ›
Accounting terminology is the language of accounting. It is used to describe accounting concepts and terms such as income, expenses, assets and liabilities etc. These concepts are all essential elements in understanding how accounting works.
How to classify accounts in accounting? ›
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.
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.
What are the different types of financial accounting? ›
There are two primary types of financial accounting: the accrual method and the cash method. The main difference between them is the timing in which transactions are recorded.
What are the 5 basic accounting principles? ›
What are the 5 basic principles of accounting?
- Revenue Recognition Principle. When you are recording information about your business, you need to consider the revenue recognition principle. ...
- Cost Principle. ...
- Matching Principle. ...
- Full Disclosure Principle. ...
- Objectivity Principle.
Basic accounting concepts used in the business world cover revenues, expenses, assets, and liabilities. These elements are tracked and recorded in documents including balance sheets, income statements, and cash flow statements.
What is the 5 concept in accounting? ›
: Business Entity, Money Measurement, Going Concern, Accounting Period, Cost Concept, Duality Aspect concept, Realisation Concept, Accrual Concept and Matching Concept.
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.
How many types of GL accounts are there? ›
There are three types of General Ledger accounts that can be created: Asset, Revenue, and Liability.
What are the five types of accounts typically used at a bank? ›
There are many different kinds of bank accounts, each with their own pros and cons. Common account types include checking, savings, money market, CDs, IRAs and brokerage accounts.
