Types of Accounts and Three Golden rules of accounting - Journal Entries, Class11, Book-Keeping and Accountancy

In a journal entry of every business transaction, generally, two accounts are affected. One of the accounts is Debited and the other is Credited.

Before recording a journal entry, it is important to understand different types of accounts maintained under Book-Keeping & Accountancy and also three Golden Rules of Accounting.

Following are three different types of accounts maintained under Book-Keeping.

1. Real a/c
2. Personal a/c

3. Nominal a/c

1. Real account - All assets of a firm, whether tangible or intangible, fall under the category “Real Accounts“.

Examples of tangible real accounts are land, building, machinery, cash, etc.

Examples of intangible real accounts are goodwill, patents, trademarks, copyrights, etc.

The Golden rule for real accounts is “Debit what comes in, Credit what goes out”.

Suppose if in case of any transaction cash is coming into the business, Cash a/c will be debited in such a transaction as the golden rule for real accounts says 'Debit what comes in'. Cash Sales is an example of such a transaction. In the case of goods sold for cash (cash sales), cash comes in the business.

Similarly, if in case of any transaction cash goes out of the business, then cash a/c will be credited. Cash Purchase is an example of such a transaction. When goods are purchased for cash (cash purchases), cash goes out of business. Hence, in this case, Cash a/c will be credited.

2. Personal account - These accounts are related to individuals, firms, companies, etc.

Personal Accounts are of three types-

Natural personal accounts:  This type of personal accounts refer to accounts of human beings i.e. Natural persons who are created by God. For example, Ram’s a/c, Sita’s a/c, etc.

Artificial personal accounts: This type of personal account represents Artificial Persons such as corporate bodies and institutions. Artificial persons are not human beings but can act and work like humans. They have a separate identity in the eyes of law and are capable to enter into agreements. These include Co-operative Societies, Private Limited Companies, Public Limited Companies, etc. For example, XYZ Ltd, ABC Pvt Ltd, etc. 

Representative personal accounts: Accounts which represent a certain person or a group of people directly or indirectly are Representative Personal Accounts. Accounts related to outstanding and prepaid items are Representative Personal Accounts. For example, outstanding salaries account is one such account. Say the company may not have paid last month's salary to its employees. Salary of the staff will be shown collectively in an account called outstanding salaries a/c. This account is a personal account as it represents a group of people. Even if the salary of one employee is outstanding, it will still be shown under outstanding salaries a/c. Similarly, let’s say that wages are paid in advance to an employee. In this case, a prepaid wages account will be opened in the books of accounts. This prepaid wages account is a representative personal account indirectly linked to the person.

Other examples of representative personal accounts are capital a/c and drawings a/c. Both these accounts represent owner's a/c.

The Golden rule for personal accounts is “Debit the receiver, Credit the giver”

For example, suppose cash is paid to Mr.X. In case of this transaction since Mr.X is the receiver (of cash), his account will be debited.

Suppose cash is received from Mr.X. In case of this transaction since Mr.X is the giver (of cash), his account will be credited.

3. Nominal account - Accounts which are related to expenses, losses, incomes and gains are called Nominal accounts. For example, Salary a/c, Purchase a/c, Sales a/c, Commission paid a/c, Commission received a/c, etc.

The Golden rule for nominal accounts is “Debit all expenses & losses, Credit all incomes & gains”.

For example, let's say rent is paid in cash. In this transaction, rent account is affected and it will be debited as in this case rent is an expense.

Let's say rent is received in cash. In this case also rent a/c is affected. But in this case rent account will be credited as rent is an income in this case.

Hence, steps to be followed for passing a journal entry of any transaction are as follows-

1. Identify accounts affected by the transaction.
2. Decide accounts belong to which category of accounts (Real/Personal/Nominal)
3. Apply the golden rules to decide which account/s to be debited and which account/s to be credited

Amount of Debit should match with the amount of Credit.




Refer Journal Entries of following transactions for better understanding-

1. Started Business with Cash

Owner is starting the business by investing his own cash. From the point of view of business, in this particular transaction, the two accounts affected are Cash a/c and Capital (owner’s) a/c.

Cash a/c is real account and will be debited in this transaction as cash is coming into the business under this transaction. The Golden rule of real accounts states 'Debit what comes in, Credit what goes out)

Capital a/c is a representative personal account. It represents the account of the owner. Capital a/c will be credited in this case as the owner is the giver. The Golden rule of personal accounts says 'Debit the receiver, Credit the giver'

Hence the journal entry will be

Cash a/c ………………... Dr

To Capital a/c

(Being business started with cash)

2. Rent Paid

In the above transaction, the two accounts which are affected are

Rent (Nominal a/c) and Cash a/c (Real a/c)

Rent a/c will be debited as it is an expense. Golden Rule for Nominal a/c says 'Debit all expenses/losses, Credit all incomes/gains'

Cash a/c will be credited as cash is going out of the business. Golden Rule for Real a/c says 'Debit what comes in, Credit what goes out'

So the journal entry will be

Rent a/c………………………………Dr

To Cash a/c

(Being Rent Paid)

Note - If Rent is paid by cheque, Bank a/c will be credited instead of Cash a/c.

3. Cash withdrawn from Bank

In this particular transaction, two accounts are affected -

1. Cash a/c (Real a/c)
2. Bank a/c (Personal a/c)

Cash a/c will be debited as cash is coming in the business. The Golden rule for Real a/c says debit what comes in, credit what goes out. (refer golden rules above).

Bank a/c will be credited as Bank is the giver. The Golden rule for Personal a/c says debit the receiver, credit the giver (refer golden rules above).

So journal entry will be as follows-

Cash a/c ……………………….. Dr

To Bank a/c

(Being Cash withdrawn from Bank)

4. Goods sold for cash (Cash Sales)

In this particular transaction, two accounts are affected -

Cash a/c (Real a/c)

AND

Sales a/c (Nominal a/c)

Cash a/c will be debited as the golden rule for real accounts says 'Debit what comes in' (refer golden rule for real accounts above). In the case of goods sold for cash (cash sales), cash comes in the business.

Sales a/c will be credited as it is an income. Golden rules for Nominal accounts says ‘Credit all incomes/gains’ (refer golden rule for nominal accounts above).

Hence, the journal entry will be

Cash a/c ……………………………..Dr

  To Sales a/c

(Being goods sold for cash)

Note : If the payment is received by cheque, Bank a/c will be debited in place of Cash a/c.

5. Interest received in cash.

In this particular transaction, the following two accounts are affected -

Cash a/c (Real a/c)

AND

Interest a/c (Nominal a/c)

Cash a/c will be debited as the golden rule for real accounts says 'Debit what comes in' (refer golden rule for real accounts above). In this case, cash is coming in the business.

Interest a/c will be credited as it is an income. Golden rules for Nominal accounts says ‘Credit all incomes/gains’ (refer golden rule for nominal accounts above).

Hence, the journal entry will be

Cash a/c ……………………………..Dr

To Interest a/c

(Being Interest received in cash)

6. Interest paid in cash

The following two accounts are affected in this particular transaction -

Interest a/c (Nominal a/c)

AND

Cash a/c (Real a/c)

Interest a/c will be debited as it is an expense. Golden rules for Nominal accounts says ‘Debit all expenses/losses’ (refer golden rule for nominal accounts above).

Cash a/c will be credited as cash is going out of the business. The golden rule for real accounts says 'Credit what goes out' (refer golden rule for real accounts above).

Hence, the journal entry will be

Interest a/c ……………………………..Dr

To Cash a/c

(Being Interest paid in cash)

Note - If interest is paid by cheque then Bank a/c will be credited in place of Cash a/c.

7. Commission received

Assuming that commission is received in cash, in this particular transaction, the following two accounts are affected -

Cash a/c (Real a/c)

AND

Commission a/c (Nominal a/c)

Cash a/c will be debited as the golden rule for real accounts says 'Debit what comes in' (refer golden rule for real accounts above). In this case, cash is coming into the business.

Commission a/c will be credited as it is an income. Golden rules for Nominal accounts says ‘Credit all incomes/gains’ (refer golden rule for nominal accounts above).

Hence, the journal entry will be

Cash a/c ……………………………..Dr

    To Commission a/c

(Being commission received in cash)

Note - If the commission is received by cheque, Bank a/c should be debited in place of Cash a/c.

8. Cash deposited in bank

In this particular transaction, the two accounts which are affected are as follows -

Bank a/c (Personal a/c)

AND

Cash a/c (Real a/c)

Bank a/c will be debited as Bank is the receiver (of cash). The Golden rule for Personal a/c says debit the receiver (refer golden rules above).

Cash a/c will be credited as cash is going out of the business. The Golden rule for Real a/c says credit what goes out. (refer golden rules above).

So journal entry will be as follows-

Bank a/c ……………………….. Dr

To Cash a/c

(Being Cash deposited in Bank)