HomeAccounting Basics

For a better financial reporting system classification of accounts is necessary. Similar nature  of transactions are brought together in order to create reports. For example travelling expense of an organisation is recorded in the journal book on various date.It is difficult to find-out the total of travelling expense in a week or in month. You have to look carefully each date expense and make total in your calculator to get this result. To overcome this difficulty we are creating account for each types of expenses,Income, payments & receipt, payable & receivable. And transfer the similar nature of transactions in the account.

Classification of account in Accounting

For better reporting system Accounts are mainly classified in to three in book keeping system.
Recommend read : What is Accounts?
                                What is a Ledger?
  • Real Account:- Real accounts are related to asset account which can be touched felt, eg building account, machinery account, stock,furniture etc
  • Personal Account:- Personal accounts are related to persons, institutions companies. examples are bank account, creditors a/c etc
  • Nominal Account:- Nominal accounts are related to income and expenses or losses and gains, examples are rent, commission, salary etc

What is Dual Aspect

In every transaction there are two aspects or elements.They are called Debit & Credit .If there is a debit there has to be a corresponding credit, Let,s explain this with an example. Purchased a car for Rs 100000.00 . In This transaction first aspect is “car” by spending money business acquiring a car worth Rs 100000.00, the second aspect is cash, spending money towards value of car.
  1. Car is coming in to business
  2. Cash going out from the business

Rules For Debit And Credit

The rules of debit and credit is popularly known as golden rules of accounting in India.These rules are the pillars of accounting.All Financial statements are based on these rules.

Real Account

The Rules for Real Account in accounting is

Debit What Comes In

Credit What Goes Out

Lets learn this with a Transaction,  Furniture purchased for 2500.00  First of all try to understand which types of accounts are involved in this transaction. Furniture & cash are dealing in this transaction. Both furniture and cash are asset. so both aspects ( debit, credit) are related to real account. Now check what is the Rule for Real account.“Debit what comes in” , Here furniture is coming in the business, So the debit aspect is furniture.Then Real account rules for credit ” Credit what goes out” Cash is going out so credit “cash”.

Particulars Debit(Dr) Credit(Cr)
Furniture 2500.00 0.00
Cash 0.00 2500.00

Personal Account

The Rule for Personal account is

Debit The Receiver                                                                                                                

Credit The Giver

Now We can move on to the Personal account.Let’s find out the debit & credit for the transaction “Furniture purchased from Mozart Furnitures on credit For 3000.00”.what are the two aspects in this transaction? 1.Furnitures   2. Mozart Furnitures .Then find out the type of accounts involved in this transaction. As furniture is an asset real account is involved & Mozart Furniture is a company or sole trader or partnership firm, it is a personal account.What are the rules for these two account type “Debit What comes in” Furniture is coming in to the business so debit is given to the furniture
now take the rules for personal account “Credit the giver” who is giving the furniture ? SO credit is given to “Mozart furnitures”.

Particulars Debit(Dr) Credit(Cr)
Furniture 3000.00 0.00
Mozart Furnitures 0.00 3000.00

Nominal Account

Debit All Expenses or Losses
Credit All Incomes or gains

Finally Nominal Account. On every month end we are getting salary let’s think it from a companies view point. Salary paid to employees 100000.00 .The two accounting aspects are salary & cash
, then account type, salary is expense to the company, so salary comes under nominal account .as per nominal account “Debit all expenses or losses” So Debit Salary & Cash is going out of the Business,Hence Credit Cash which is real account.

Particulars Debit(Dr) Credit(Cr)
Salary 100000.00 0.00
cash 0.00 100000.00
Having said the types, It is important to know what the balance of each type of account says.

Balance of Real Account

Real accounts are relate to assets.When assets are received in the business the particular asset accounts are debited.When assets are sold or otherwise disposed of, the particular assets accounts are credited.So if an asset account has a balance it must be a debit balance.It indicates the value of asset in the possession of business.

Balance of Personal Account

The debit balance of a personal account indicates debts owing by the person and credit balance indicates debts owing to the person concerned.For the business the first one is account receivable or asset, while the second is account payable or liability. The debit balance of all personal accounts on a certain date put together will make sundry debtors and the credit balances of all personal accounts put together will make “Sundry creditors”Sundry debtors are assets and Sundry creditors are liabilities.Where as asset accounts have debit balances liability accounts have credit balances.

Closing of Nominal Accounts

Only accounts relating to assets and liabilities, that is real account and personal accounts are balanced periodically.Nominal accounts are accounts of expenses and Incomes.They are not balanced;They are closed at the end of the trading period by transferring the amounts to the debit and credit of a Profit and loss account.Before a nominal account is closed it will either show a debit balance ( Expense) or a credit balance ( Income).

Do it your self

Find out the debit and credit aspects of the following transactions

  1. 01-07-2016 Purchased land for  105000.00
  2. 02-07-2016 Purchased Goods from S.K creation on credit  200000.00
  3. 03-07-2016 Stationery purchased for  1000.00
  4. 03-07-2016 Goods sold to Indian cotton for Credit  45000.00
  5. 05-07-2016 Rent paid to building owner  1500.00
  6. 06-07-2016 Cash withdrawn for personal use  5000.00
  7. 07-07-2016 Tea expenses incurred for staff  100.00
  8. 08-07-2016 Computer purchased from computer solutions  30000.00
  9. 15-07-2016 Paid commission  500.00
  10. 20-07-2016 Deposit cash in to SBI 15000.00
  11. 20-07-2016 cash sales  25000.00
  12. 21-07-2016 Cheque Received from Indian cotton  25000.00
  13. 22-07-2016 Goods returned by Indian cotton  2500.00
  14. 28-07-2016 Cash withdrawn from SBI 10000.00
  15. 31-07-2016 Goods returned to S.K creation  5000.00

Click on below Link TO KNOW THE ANSWERS

Click Here for Answers
Sr No Date Particulars Ledger Folio( LF ) Debit Amount Credit Amount
1 1/7/2016 Land  A/c ………Dr 105000.00
To ; Cash 105000
(Being purchase land)
2 2/7/2016 Purchase A/c …..Dr 200000
To; S.K Creation 200000
(Goods purchased from SK Creation on credit)
3 3/7/2016 Printing & Stationery A/c ….Dr 1000
To; Cash 1000
Being stationery purchased as per bill noxxxx
4 3/7/2016 Indian Cottons A/c ……..Dr 45000
To; sales 45000
(Being credit sales to Indian Cotton)
5 5/7/2016 Rent  A/c …………….Dr 1500
To;Cash /Ac 1500
(Rent paid for the month of june)
6 6/7/2016 Drawings A/c ………Dr 5000
To; Cash 5000
( cash drawn for personal use)
7 7/7/2016 Staff welfare A/c……. Dr 100
To; cash 100
(Tea expense for staff )
8 8/7/2016 Computer A/c ……Dr 30000
To; Computer solutions 30000
( being computer purchased from computer solutions for credit)
9 15/07/2016 commision A/c …………..Dr 500
To; cash 500
( Paid commission)
10 20/7/2016 SBI A/c …………..Dr 15000
To; Cash 15000
( cash deposited in SBI)
11 20/7/2016 Cash ……………………Dr 25000
To; Sales 25000
( cash sales)
12 21/7/2016 SBI ( BANK A/C) ….Dr 25000
To; Indian Cotton 25000
(being cheque received from indian cotton)
13 22/7/2016 Sales retrun A/c ………Dr 2500
To; Indian cotton 2500
( being goods returned by indian cotton)
14 28/07/2016 Cash A/c ……………..Dr 10000
To; SBI A/c 10000
( being cash withdrwan for business use)
15 31/7/2016 S.K Creation …………Dr 5000
To; Purchase return 5000
( goods returned to sk creation)

Comments (14)

Leave a Reply

Your email address will not be published. Required fields are marked *

error: Content is protected !!

Related pages

trade discount in accountingindirect expenses in accountingtds applicabilitybank reconciliation statement solved problemswinrar companybank reconciliation notes pdfincome tax slab for ay 2014 15 for individualjournal entry for credit sales with discountproforma invoice formprovision for bad debts in trial balancedefine fictitious assetswhat is the meaning of debit in accountinginterest payable journal entry examplememorandum of association templatevoucher accounting definitioncash book entry examplebank to book reconciliation formatinformation about tally accounting softwarelabour contractor bill formatbank overdraft accounting definitiontaxable income slabdefine prefix autovchr noentry for bad debtsdefine ledgersexpense payable journal entrydouble entry for debit notegabe salloumhow to see tds deducteddefine sundry debtorstds deductions chartwhat is a subledgertally full formexcel shortcut pdftax rate for fy 2013-14tally practice questionsdebit credit journal entriestally pos systemaccounting entries for vatincome tax slab 2013 14 assessment yearexcel bank ledgerhow to tally in excelbkp file extensiontax deducted at sourcesicici bank bank statementunearned income in balance sheetdirect expenses and indirect expenses in accountinghow to use calculator in tallycapital receipts exampleshow to write accounts in ledgeradjusting journal entries for depreciationerp calculatortrial balance proformaledger posting and trial balancejournal entry for salary paid in advancesample voucher receiptjournal entry for paying salariesmeaning sundrytds paymentsscrap sales accountinga compound journal entry involvesicici bank bank statementtrade discount in accountingjournal voucher wikipediaaccounting ledger exampleswhat is tally accounting softwaretally question paperadjusting entries in accounting tutorialtds on professional chargeswhat is sundry debtorscash cheque receipt formatdefine sundry itemsdouble entry prepaymentdifferent types of journal entries in accountingtypes of accounts real nominal personalincome tax slab fy 2013 2014depreciation journal entrytax slab for ay 2014-15shot keys of excelsundry creditors accounttamil language software install