Classification of

Accounts

On the basis of business transaction

relating to persons, properties and
assets, income and expenses the
accounts are classified as:

 Real A/c
 Nominal A/c
 Personal A/c
 Valuation A/c
 Personal A/c- These are accounts of
individuals, firms, companies, bankers,
associations with whom businessman deals

 Real A/c- These are the accounts of

properties, assets or possessions of the
businessman

 Nominal A/c- These are accounts of

expenses or losses & gains or incomes

 Valuation A/c- These are accounts which

are concerned with valuation of assets viz.
provision for depreciation, provision for
doubtful debts etc.
Classification of Accounts –

 Personal A/c

Types of personal A/c

Groups/
Natural
Representative
Personal Artificial
Personal
A/c Personal A/c
A/c
 Rule of Personal
Account

DEBIT THE RECEIVER

CREDIT THE GIVER

For ex: if cash is paid to Ram,

Ram a/c ……………………………………Dr
To, Cash a/c
Classification of Accounts –

 Real A/c

Types of Real A/c

Tangible Intangible Real

Real A/c
A/c
 Rule of Real Account

DEBIT WHAT COMES IN

CREDIT WHAT GOES OUT

For ex: If building is purchased for cash,

Building a/c …………………….. Dr
Cash a/c
Classification of Accounts –

 Nominal A/c

Types of Nominal A/c

Expenses
Incomes and
and
Gains A/c
Losses
A/c
 Rule of Nominal
Account

DEBIT ALL EXPENSES AND LOSSES

CREDIT ALL INCOME AND GAINS

For ex: Rent paid by cash,

Rent a/c…………………………………….Dr
To, cash a/c
 Golden rules of
Accounting
 Real A/c : Dr what comes in & Cr what
goes out

 Personal A/c : Dr the receiver & Cr the

giver

 Nominal A/c : Dr all expenses & losses

& Cr all
Incomes & Gains

 Valuation A/c : Dr the A/c when it is

Both real a/c as well as Nominal a/c are
impersonal a/cs. However when some
prefix or suffix is added to a Nominal a/c
it becomes a Personal a/c.

Nominal Personal account

Account
Rent account Rent prepaid a/c, Outstanding rent a/c,

Interest account Prepaid interest a/c, Outstanding interest a/c,

Interest received in advance a/c
Salary account Prepaid salaries a/c, Outstanding salaries a/c

Insurance account Prepaid Insurance a/c, Outstanding Insurance a/c

Commission Prepaid Commission a/c, Outstanding Commission

account a/c
 Accounting Equation :

Assets = Liabilities + Owners Equity

 The rules of Dr & Cr :

viii)Dr increase in assets, Cr decrease in

assets
ix) Dr decrease in liabilities, Cr increase
in liabilities
x) Dr decrease in Owners equity, Cr
increase in Owners equity
 Accounts Debit/
Transaction Nature of a/c
involved Credit
Rent paid Rent a/c Nominal a/c Debit
Cash a/c Real a/c Credit
Salaries paid Salaries a/c Nominal a/c Debit
Cash a/c Real a/c Credit
Interest received Cash a/c Real a/c Debit
Interest a/c Nominal a/c Credit
Furniture Furniture a/c Real a/c Debit
purchased Cash a/c Real a/c Credit
Machinery sold Cash a/c Real a/c Debit
Machinery a/c Real a/c Credit
Salaries Salaries a/c Nominal a/c Debit
outstanding O/S Salaries a/c Personal a/c Credit
Telephone Telephone charges Nominal a/c Debit
charges paid a/ca/c
Cash Real a/c Credit
Paid to Suresh Suresh a/c Personal a/c Debit
Cash a/c Real a/c Credit
Received from Cash a/c Real a/c Debit
Mohan (owner) Capital a/c Personal a/c Credit
 Journalising Transaction:

 A journal is a book of primary entry.

First all the transactions are recorded in
the journal & subsequently they are
posted in ledger.

Date Particulars L Debit Credit

.F. (Rs) (Rs)
Steps in converting Transactions into
Journal Entries

 Identify the transactions from the source

documents such as receipt, voucher.

 Determine the nature of a transaction i.e.

its effect on business

Determine the two aspects of the
transaction. Find out the two accounts
involved
Steps in converting Transactions into
Journal Entries

Determine the type of each account.

 Determine how the accounts are

affected. See who is the receiver or giver
or whether there is an expense or loss &
income or gain

 Apply the rule of journalising. Decide

which account is debited and which
account is credited.
 Compound Journal
entries

Some transactions may be recorded by means of a

single journal entries instead of passing several journal
entries. Such entry (single) regarding recording a
number of transactions is termed as a ‘Compound
Journal entry’.

Such entry may be recorded in any of the following

ways:
 One particular a/c may be debited while several others
may be credited.
 One particular a/c may be credited while several others
may be debited.
 Several a/cs may be debited and several other a/cs may
be credited.
 Compound Journal entries

Illustration: Pass a compound journal entry in the

following cases:
 Payment made to Ram Rs. 1000. He allowed a cash
discount of Rs 50
 Cash received from Suresh Rs. 800 and allowed him
a cash discount of Rs. 50.
 A running business was purchased by Mohan with
following assets and liabilities:
Cash Rs. 2000, Land Rs 4000, Furniture Rs 1000,
Stock Rs 2000, Creditors Rs 1000, Bank overdraft
Rs 2000
 Opening Entry

In case of running business, the assets and

liabilities appearing in the previous year’s balance
sheet are brought forward to the current year with
the help of a journal entry known as ‘opening
entry’.

All assets accounts are debited and all liabilities

accounts are credited.
The excess of assets over liabilities is the
proprietor’s capital and is credited to his capital
account.
Pass the Opening Entry on January 1, 2008 on the
basis of the following information taken from the
business of Mr. Sunil

Cash in hand 2000 Sundry debtors

6000
Stock of goods 4000 Plant
5000
Land and building 10000 Sundry creditors
10000
Date Particulars L. Rs. Rs.
2008 Cash A/c JOURNAL F 2000
Sol. Jan. 1 Dr. 6000
Sundry Debtors A/c 4000
Dr. 5000
Stock A/c 10000
Dr.
Plant A/c 10000
Dr. 17000
Land and Building A/c
Dr.
27000 27000
To, sundry creditors
 LEDGER

A ledger is the principal book of accounts.

It is a group of accounts; it contains an
account for each asset, liability, revenue &
expense A/c
It contains all accounts of the business
enterprise whether Real, Nominal or
Personal.
Particulars JF Amt. Particular JF Amt.
Dr. Account
Cr.
 Posting process :

 The term ‘Posting’ means transferring the debit and credit

items from the Journal to their respective accounts in the
Ledger.

 While transferring the transaction from journal to ledger,

the transactions are classified. For each person, head of
expenditure, income, asset etc. separate accounts are
opened in the ledger.

 On debit side : Write the name of the credited a/c in the

journal after the word “To”.
 On the credit side : Write the name of the debited a/c in the
journal after the word “By”.
 Posting process :
 All the transactions relating to a particular a/c should be
recorded in the a/c already opened. No new a/c of the same
name should be opened in the ledger

 The concerned a/c which has been debited (credited) in the

journal should also be debited (credited) in the Ledger.
However, a reference should be made of the other a/c which
has been credited (debited) in the Journal.

 At the end of the accounting period, the a/cs are balanced

 If the debit side is heavier the difference will appear on the

credit side as, “By balance c/d” in the particulars column. If the
credit side is heavier, the difference will appear on the debit
side as , “To balance c/d”
Journalise the following transactions and post
them into the Ledger:
Ram started business with a capital of Rs 10000
He purchased furniture for cash Rs 4000
He purchased goods from Mohan on credit Rs 2000
He paid cash to Mohan Rs 1000

 Sol: Journal
Date Particulars LF Debit Credit
Cash A/c (Rs)
10000 (Rs)
Dr. 10000
To, Capital
Furniture A/c A/c 4000
Dr. 4000
To, Cash
Purchases A/c A/c 2000
Dr. 2000
Mohan To,
A/c Mohan 1000
Dr. 1000
To, Cash A/c
 Purpose of balancing
ledger a/cs:

 The technique of finding out the net balance of an account after

considering the totals of both debit and credit appearing in the
account is known as ‘Balancing the account’.

 Personal a/cs are balanced to know whether a person is a

debtor or a creditor. A debit balance indicates that the person is
our debtor & a credit balance indicates that the person is our
creditor .

 A debit balance of a real a/c means an asset & a credit balance

means liability

 Debit balance of a nominal a/c means expense & a credit

balance represents income
Relationship between Journal and a
Ledger
 The transactions are first recorded in the Journal and
then they are posted in the Ledger. Thus, the Journal
is the book of original or primary entry, while Ledger
is the book of second or principal entry.

 Journal records transaction in a chronological order,

whereas the Ledger records transaction in an
analytical order.

 Journal is more reliable as compared to the Ledger

since it is the in which the entry is passed first of all.

 The process of recording transactions is termed as

‘Journalising’, while the process of recording
transaction in a Ledger is known as ‘Posting’.