2019-12-17 12:12:57Accountants and BookkeepersEnglishAn Account is an outline of business transactions in respect of persons, their representatives and things. Thus, there are 3 types of...https://quickbooks.intuit.com/in/resources/in_qrc/uploads/2019/12/What-Are-The-3-Types-of-Accounts-in-Accounting.jpghttps://quickbooks.intuit.com/in/resources/accountants-and-bookkeepers/types-of-accounts/What Are The 3 Types of Accounts in Accounting?

What Are The 3 Types of Accounts in Accounting?

10 min read

Try QuickBooks Invoicing & Accounting Software – 30 Days Free Trial.


Financial Accounting is based on ‘Principle of Duality’ which states that each business transaction recorded in books of accounts has a two fold effect. In other words, each transaction involves at least two accounts when recorded in the books of accounts.

For instance, Kapoor Pvt Ltd purchases 1,000 units of raw material worth Rs 1 Lakh for its business. In this transaction, Kapoor Pvt Ltd receives raw material in return of cash worth Rs 1 Lakh. In other words, raw material is what comes into the business and cash worth Rs 1 Lakh goes out of the business.

Thus, such a transaction impacts the stock of raw material, thereby increasing the same by 1,000 units. On the other hand, it also impacts cash available with the business, reducing it by Rs 1 Lakh.

This is ‘Double Entry System’ of Accounting that is typically followed when preparing books of accounts of a business. It is based on the ‘Dual Accounting Concept’ as per which every business transaction has an equal and opposite effect in minimum two different accounts.[/vc_column_text]

What is an Account?

Account is nothing but an outline of the transactions undertaken by the business in respect of persons, their representatives and things.

For instance, when a business enters into transactions with suppliers or customers, both suppliers and customers act as separate accounts.

Similarly, business purchasing tangible items like plant, machinery, land, building etc treats each of the tangibles as individual accounts. Such accounts are related to things.

Thus, whenever a business undertakes transactions, it must identify the accounts involved and then apply the requisite accounting standards and golden accounting rules to record such transactions.

Further, an account is usually represented in a T-Format. Thus, a T Account has two sides to it. The left side is known as the debit side whereas the right side of an account is labeled as the credit side.

So, a T-Account is prepared in the following manner:

Plant Account

Particulars (Dr)

(Debit Side)

Amount

(In Rupees)

Particulars (Cr)

(Debit Side)

Amount

(In Rupees)

Types of Accounts

Accounts are classified into following categories:

  • Personal Account
    • Natural Personal Account
    • Artificial Personal Account
    • Representative Personal Account
  • Real Account
    • Tangible Real Account
    • Intangible Real Account
  • Nominal Account

1. Personal Account

As the name suggests, Personal Accounts are the ones that are related with individuals, companies, firms, group of associations etc. These persons could include natural persons, artificial persons or representative persons.

Type of Personal Accounts

a. Natural Persons

These accounts relate to natural persons such as Veer’s A/c, Ayan’s A/c, Karen’s A/c etc.

b. Artificial Accounts

These accounts relate to companies and institutions such as Kapoor Pvt Ltd A/c, Booker’s Club A/c etc. Thus, companies and institutions are the entities that exist in the eyes of law.

c. Representative Accounts

Accounts that are a representative of some person are called as representative accounts. These include Outstanding Interest A/c, Outstanding Wages A/c, Prepaid Expense A/c etc.

Golden Rule Related To The Personal Account

Debit the Receiver, Credit the Giver

Illustration

Karan purchased a machinery from M/s Sharma worth Rs 10,00,000 on credit. So, this transaction involves two accounts: a Personal Account of M/s Sharma and Machinery Account. Thus, purchasing a machinery worth Rs 10,00,000 on credit means that M/s Sharma is providing the Machinery to Karan for his business. The Golden Rule of Personal Account says, “Debit the Receiver, Credit the Giver”.

Since M/s Sharma is the Giver in this transaction, his Personal Account will be credited with Rs 10,00,000. Whereas, Machinery A/c would be debited with the same amount.

Thus, this transaction will be recorded in the respective accounts as follows:

Machinery Account

Particulars (Dr)

Amount

(in Rs)

Particulars (Cr)Amount

(in Rs)

To M/s Sharma10,00,000
M/s Sharma Account

Particulars (Dr)

Amount

(in Rs)

Particulars (Cr)Amount

(in Rs)

By Machinery10,00,000

2. Real Account

Real Accounts are the ones that are related with properties, assets or possessions. These properties can be both physically existing as well as non physical in nature. Thus, Real Accounts can be of two types: Tangible Real Accounts and Intangible Real accounts.

a. Tangible Real Accounts

Tangible Real Accounts are accounts which have physical existence. In other words, such assets can be seen, felt or touched. For example Machinery A/c, Vehicle A/c, Building A/c etc.

a. Intangible Real Accounts

These are the assets or possessions that do not have physical existence but can be measured in terms of money. This means that such assets have some value attached to them.

For example, trademarks, patents, goodwill, copyrights etc.

Golden Rule Related To The Personal Account

Debit What Comes In, Credit What Goes Out

Illustration

Karan purchased a vehicle for his business worth Rs 5,00,000 in cash. So, this transaction involves two real accounts: Vehicle Account and Cash Account.

Thus, purchasing a Vehicle worth Rs 5,00,000 in cash means Vehicle is coming into the business. Whereas, Cash is going out of the business. The Golden Rule of Real Account says, “Debit What Comes in, Credit What Goes Out”.

Both Vehicle and Cash being Real Accounts, therefore, Vehicle A/c will be debited with Rs 5,00,000. Whereas, Cash A/c will be credited with the same amount.

Thus, this transaction will be recorded in the respective accounts as follows:

Vehicle Account

Particulars (Dr)

Amount

(in Rs)

Particulars (Cr)Amount

(in Rs)

To Cash5,00,000
Cash Account

Particulars (Dr)

Amount

(in Rs)

Particulars (Cr)Amount

(in Rs)

By Vehicle5,00,000

3. Nominal Account

Nominal Accounts relate to income, expenses, losses or gains. These include Wages A/c, Salary A/c, Rent A/c etc.

Golden Rule Related To The Personal Account

Debit All Expenses and Losses, Credit All Incomes and Gains

Illustration

Karan paid wages worth Rs 1,00,000 in cash. So, this transaction involves two accounts: Nominal Account of Wages and Real Account of Cash.

Thus, paying wages worth Rs 1,00,000 in cash means wages are an expense to the business. And Cash is paid towards such an expense. Now Golden Rules pertaining to two accounts would apply in such a case. The Golden Rule of Nominal Account says, “Debit All Expenses and Losses, Credit All Incomes and Gains”.Whereas, Golden Rule of Real Account says, “Debit What Comes In, Credit What Goes Out”.

Thus, Wages A/c will be debited with Rs 1,00,000. Whereas, Cash A/c will be credited with the same amount.

Thus, this transaction will be recorded in the respective accounts as follows:

Wages Account

Particulars (Dr)

Amount

(in Rs)

Particulars (Cr)Amount

(in Rs)

To Cash1,00,000
Cash Account

Particulars (Dr)

Amount

(in Rs)

Particulars (Cr)Amount

(in Rs)

By Wages1,00,000

Example

Let’s consider the transactions taken in the above examples and apply these rules to see the dual accounts involved in every transaction.

1. Karan started a business with Rs 10,00,000.

Accounts Involved: Cash – Real Account, Karan’ Capital – Personal Account
Effect of Transaction: Cash (asset) increases by Rs 10,00,000 and Capital (liability) increases by Rs 10,00,000.

Cash Account

Particulars (Dr)

Amount

(in Rs)

Particulars (Cr)Amount

(in Rs)

To Capital10,00,000
Karan’s Capital Account

Particulars (Dr)

Amount

(in Rs)

Particulars (Cr)Amount

(in Rs)

By Cash10,00,000

2. Karan deposited Rs 9,60,000 in Bank of Baroda

Bank Account

Particulars (Dr)

Amount

(in Rs)

Particulars (Cr)Amount

(in Rs)

To Cash9,60,000

Accounts Involved: Cash – Real Account, Bank of Baroda – Personal Account
Effect of Transaction: Cash at Bank (asset) increases by Rs 9,60,000 and Cash (asset) decreases by Rs 9,60,000.

Cash Account

Particulars (Dr)

Amount

(in Rs)

Particulars (Cr)Amount

(in Rs)

By Bank9,60,000

3. Purchased Furniture worth Rs 6,00,000 and in return a cheque is issued on the same day

Accounts Involved: Bank – Real Account, Furniture – Real Account
Effect of Transaction: Furniture (asset) increases by Rs 6,00,000 and the Bank (asset) decreases by Rs 6,00,000.

Furniture Account

Particulars (Dr)

Amount

(in Rs)

Particulars (Cr)Amount

(in Rs)

To Bank6,00,000
Bank Account

Particulars (Dr)

Amount

(in Rs)

Particulars (Cr)Amount

(in Rs)

By Furniture6,00,000

4. Purchased Machinery for Rs 2,00,000 and an advance of Rs 30,000 is paid in cash to M/s Singhania

Accounts Involved: Machinery – Real Account, Cash – Real Account, Singhania – Personal Account
Effect of Transaction: Machinery (asset) increases by Rs 2,00,000, Cash (asset) decreases by Rs 30,000 and Creditors (liability) increases by Rs 1,70,000.

 

Machinery Account

Particulars (Dr)

Amount

(in Rs)

Particulars (Cr)Amount

(in Rs)

To M/s Singhania1,70,000
To Cash30,000
Cash Account

Particulars (Dr)

Amount

(in Rs)

Particulars (Cr)Amount

(in Rs)

By Machinery30,000
Singhania Account

Particulars (Dr)

Amount

(in Rs)

Particulars (Cr)Amount

(in Rs)

By Machinery1,70,000

5. Goods bought from M/s Khanna worth Rs 70,000

Accounts Involved: Stock – Real Account, M/s Khanna – Personal Account
Effect of Transaction: Goods increase by Rs 70,000 and the Creditors (liability) increases by Rs 70,000.

Stock Account

Particulars (Dr)

Amount

(in Rs)

Particulars (Cr)Amount

(in Rs)

To M/s Khanna70,000
M/s Khanna Account

Particulars (Dr)

Amount

(in Rs)

Particulars (Cr)Amount

(in Rs)

By Stock70,000

6. Goods worth Rs 50,000 sold to Bector Enterprises for Rs 60,000

Accounts Involved: Stock – Real Account, Bector Enterprises – Personal Account, Karan’s Capital – Personal Account
Effect of Transaction: Debtors (asset) increased by Rs 60,000, Goods (asset) decrease by Rs 50,000 and Capital (Profit) increases by Rs 10,000.

Stock Account

Particulars (Dr)

Amount

(in Rs)

Particulars (Cr)Amount

(in Rs)

By Bector Enterprises50,000
Bector Enterprises Account

Particulars (Dr)

Amount

(in Rs)

Particulars (Cr)Amount

(in Rs)

To Stock50,000
To Capital10,000
Capital Account

Particulars (Dr)

Amount

(in Rs)

Particulars (Cr)Amount

(in Rs)

By Bector Enterprises10,000
[/vc_column][/vc_row]

All Topics

 

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

Related Articles

Accounting Basics: What is Cost Accounting?

In this article you will learn: What is Cost Accounting? Cost Accounting…

Read more

GST PDF: An Overview of Goods and Services Tax

List of GST pdf Documents By Official Sites: PDF – (CBIC) –…

Read more

Royalties Accounting: Meaning, Accounting Treatment & Examples

Try QuickBooks Invoicing & Accounting Software – 30 Days Free Trial. In…

Read more