Accounting Systems & Types of Accounts

Every transaction in business affects at least TWO accounts. But which accounts? Let's learn the classification.

Types of Accounts - The Three Categories

1. Personal Accounts

Definition: Accounts of persons (real humans, companies, or artificial entities)

Includes:

• Real Persons: Ram's Account, Mohan's Account
• Artificial Persons: HDFC Bank, Reliance Ltd, State Bank of India
• Representative Persons: Outstanding Salary A/c, Prepaid Rent A/c

Examples:

• Ramesh (customer who owes you money)
• ICICI Bank
• Tata Motors Ltd
• Capital Account (represents owner)
• Drawings Account (represents owner)

Golden Rule:

• Debit the receiver
• Credit the giver

Example: You paid ₹10,000 cash to Ramesh.

• Ramesh received → Debit Ramesh A/c
• You (cash) gave → Credit Cash A/c

2. Real Accounts

Definition: Accounts of assets and properties (things you can touch/see)

Includes:

• Tangible: Cash, Furniture, Building, Machinery, Stock, Land
• Intangible: Goodwill, Patents, Trademarks

Examples:

• Cash Account
• Furniture Account
• Building Account
• Machinery Account
• Stock/Inventory Account

Golden Rule:

• Debit what comes in
• Credit what goes out

Example: Purchased furniture for ₹50,000 cash.

• Furniture came in → Debit Furniture A/c
• Cash went out → Credit Cash A/c

3. Nominal Accounts

Definition: Accounts related to expenses, losses, incomes, and gains

Includes:

• All Expenses: Salary, Rent, Electricity, Depreciation
• All Losses: Loss by Fire, Loss by Theft
• All Incomes: Interest Received, Commission Received, Discount Received
• All Gains: Profit on Sale of Asset

Examples:

• Salary Account
• Rent Account
• Interest Received Account
• Commission Earned Account
• Bad Debts Account

Golden Rule:

• Debit all expenses and losses
• Credit all incomes and gains

Example: Paid salary ₹30,000 in cash.

• Salary is expense → Debit Salary A/c
• Cash went out → Credit Cash A/c

The Golden Rules Summary Table

Account Type	Debit	Credit	Example
Personal	Receiver	Giver	Paid to Ramesh → Dr. Ramesh
Real	What comes in	What goes out	Bought furniture → Dr. Furniture
Nominal	Expenses & Losses	Incomes & Gains	Paid rent → Dr. Rent

Modern Classification (Alternative Approach)

Many accountants now use a 5-category system:

Category	Debit	Credit
Assets	Increase in assets	Decrease in assets
Liabilities	Decrease in liabilities	Increase in liabilities
Capital	Decrease in capital	Increase in capital
Income	Decrease in income	Increase in income
Expenses	Increase in expenses	Decrease in expenses

Practical Examples with Analysis

Example 1: Started business with cash ₹1,00,000

Analysis:

• Cash A/c (Real) → Cash came in → Debit
• Capital A/c (Personal) → Owner gave → Credit

Entry:

Account	Debit	Credit
Cash A/c	₹1,00,000
To Capital A/c		₹1,00,000

Example 2: Purchased goods for ₹20,000 from Mohan on credit

Analysis:

• Purchases A/c (Nominal - Expense) → Debit
• Mohan A/c (Personal) → Mohan gave → Credit

Entry:

Account	Debit	Credit
Purchases A/c	₹20,000
To Mohan A/c		₹20,000

Example 3: Sold goods for ₹30,000 cash

Analysis:

• Cash A/c (Real) → Cash came in → Debit
• Sales A/c (Nominal - Income) → Income → Credit

Entry:

Account	Debit	Credit
Cash A/c	₹30,000
To Sales A/c		₹30,000

Example 4: Paid rent ₹5,000

Analysis:

• Rent A/c (Nominal - Expense) → Debit
• Cash A/c (Real) → Cash went out → Credit

Entry:

Account	Debit	Credit
Rent A/c	₹5,000
To Cash A/c		₹5,000

Example 5: Withdrew ₹10,000 for personal use

Analysis:

• Drawings A/c (Personal - Owner took) → Debit
• Cash A/c (Real) → Cash went out → Credit

Entry:

Account	Debit	Credit
Drawings A/c	₹10,000
To Cash A/c		₹10,000

Common Confusions Cleared

Is "Purchases" a Real or Nominal Account?

Answer: Nominal (it's an expense for trading business)

Is "Debtors" a Real or Personal Account?

Answer: Personal (Debtors are persons who owe you money)

Is "Outstanding Salary" a Real or Personal Account?

Answer: Personal (Representative of employees)

Identification Practice

Account Name	Type	Why?
Cash	Real	Tangible asset
Ramesh	Personal	Individual person
Salary	Nominal	Expense
Furniture	Real	Tangible asset
Bank of Baroda	Personal	Artificial person
Rent Received	Nominal	Income
Goodwill	Real	Intangible asset
Outstanding Rent	Personal	Representative
Commission Paid	Nominal	Expense
Mohan & Sons	Personal	Firm/entity

Accounting Equation Reminder

Assets = Liabilities + Capital

Every transaction maintains this balance:

• If assets increase → Either liabilities increase OR capital increases
• If assets decrease → Either liabilities decrease OR capital decreases

Quiz

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💡 Final Wisdom: "Master these three types and their golden rules. Every journal entry you'll ever make follows these rules. Learn them by heart, practice daily, and accounting becomes second nature!"