Classification of accounts and Accounting Rules :

Accounting rules and classification of accounts are done on the basis of following approaches:

                             TRADITIONAL APPROACH

 A) Classification of Accounts as per Traditional Approach:

 i) Personal Accounts :

Personal accounts connected with persons, trade receivables (Sundry Debtors) or trade payables (Sundry Creditors), bank and the owner. Personal Accounts can be further divided into three categories : Natural personal account, artificial personal account and representative personal account.

ii) Real Accounts :

These accounts are related with the assets of the firm. For example, land, building, Plant, Machinery, investment, fixed deposits, Cash in hand and Cash at the bank accounts are real accounts.

iii) Nominal Accounts :

These are the Accounts of expenses, losses, gains, revenue, etc. like Traveling expenses account, Salary account, Discount received account, Sales account. The net result of all the nominal accounts is shown as profit or loss.

B) Accounting Rules as per Traditional Approach (Also known as Golden Rules of Accounting):

All the above classified accounts have two golden rules of accounting each, one related to Debit and one related to Credit for recording the transactions.

Personal Accounts:    Debit the Receiver and Credit the giver.

Real Accounts:          Debit what comes in and Credit what goes out.

Nominal Accounts:    Debit all expenses and losses and credit all income, revenue and gains.

  All above Accounting Rules are also called as Golden Rules of Accounting.

Note:   The terms debit and credit merely describe the two sides of accounts.

Some examples :

Case A)  Goods of Rs. 25,000 sold to Mohan on credit.

Case B)  Cash Rs. 11,000 received from Mohan.

Case C)  Additional Capital brought in business – Rs. 1,50,000.

Case D)  Salary of Rs. 20,000 paid to employee by cheque.

 Solution :

Case A) Goods of Rs. 25,000 sold to Mohan on credit.

In this case, Sales account and Mohan(Sundry Debtors) account are involved. As per Golden rules of accounting, Sales Account is a nominal account and Mohan (Sundry Debtors) Account is personal account. Read rule for nominal account i.e. credit all income, revenue and gains and for personal account i.e. debit the receiver. Entry in the books of account will be as follows:

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Case B) Cash Rs. 11,000 received from Mohan.

In this case, Cash account and Mohan(Sundry Debtors) account are involved. As per Golden rules of accounting, Cash Account is a real account and Mohan (Sundry Debtors) Account is personal account. Read rule for Real account i.e. debit what comes in and for personal account i.e. credit the giver. Entry in the books of account will be as follows:

Case C) Additional Capital brought in business – Rs. 1,50,000.

In this case, Cash account and Owner’s Capital account increases with Rs. 1,50,000. As per Golden rules of accounting, Cash Account is a real account and Owner’s Capital Account is personal account. Read rule for Real account i.e. debit what comes in and for personal account i.e. credit the giver. Entry in the books of account will be as follows:

Case D) Salary of Rs. 20,000 paid to employee by cheque.

In this case, Bank account and Salary(Expenses) account are involved. As per Golden rules of accounting, Bank Account is a personal account and Salary (Expenses) Account is nominal account. Read rule for Personal account i.e. credit the giver and for nominal account i.e. debit all expenses and losses. Entry in the books of account will be as follows:

Nowdays, traditional approach to classify accounts is rarely used by accountant in developed countries.                         

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                             MODERN APPROACH

 A) Classification of Accounts as per Modern Approach

As per Modern Approach, Accounts are classified into following categories:

Assets Account :  It includes all fixed assets and currents assets.

Liabilities Account : It includes all Long term liabilities, Short term liabilities and Current liabilities.

Capital Account : It includes capital account, reserve and surplus etc.

Revenue Account : It includes gains, sales, income received etc.

Expenses Account : It includes expenses, purchases, commission paid etc.

B) Accounting Rules as per Modern Approach:

All the above classified accounts have modern rules of accounting, Increase or decrease in particular account will decide whether it is related to Debit side or Credit side for recording the transactions.

1. Increases in assets are debited;  decreases in assets are credited.
2. Increases in liabilities are credited;  decreases in liabilities are debited.
3. Increases in owner’s capital are credited;  decreases in owner’s capital are debited.
4. Increases in expenses are debited;  decreases in expenses are credited.
5. Increases in revenue or incomes are credited;  decreases in revenue or incomes are debited.

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Some examples :

Case A) Goods of Rs. 25,000 sold to Mohan on credit.

Case B) Cash Rs. 11,000 received from Mohan.

Case C) Additional Capital brought in business – Rs. 1,50,000.

Case D) Salary of Rs. 20,000 paid to employee by cheque.

 Solution :

Case A) Goods of Rs. 25,000 sold to Mohan on credit. 

In this case, Sales(Revenue) account and Mohan(Debtors/Assets) account, both accounts are increased by Rs.25,000. An as per modern approach, Increase in Revenue or incomes are recorded on credit side  and increase in assets are recorded on debit side of relevant account. Entry in the books of account will be as follows:

Case B) Cash Rs. 11,000 received from Mohan. 

In this case, Cash(Assets) account increases and Mohan(Debtors/Assets) Account decreases by Rs.11,000. As per modern approach, Increase in assets are recorded on debit side and decrease in assets are recorded on credit side of relevant account. Entry in the books of account will be as follows:

Case C) Additional Capital brought in business – Rs. 1,50,000.  

In this case, Cash (Assets) account and Owner Capital Account, both accounts increase by Rs. 1,50,000. As per modern approach, Increases in Assets are debited and increases in Capital are credited to relevant account. Entry in the books of account will be as follows:

Case D) Salary of Rs. 20,000 paid to employee by cheque.

In this case, Bank (Assets) account decreases and Salary (expenses) Account increases by Rs.20,000. As per modern approach, Decrease in Assets are recorded on credit side and increase in expenses are recorded on debit side of relevant account. Entry in the books of account will be as follows:

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