WHAT IS AN ACCOUNT ?

 1.5 WHAT IS AN ACCOUNT ?

You have learnt'that every business transaction has dual effect and that under Double Entry Systerrl ent~ies are made in both the accuunls affected. You also.learn1 that the account which involves receiving aspect is debited and the account which involves giving aspect is credited. In order to understand the rules of debit and credit you rnust know more about the term 'account'. An account is a summarised redord of all transactions relating Lo a particular person, a thing, or an item of income or expense. It is vertically divided into two halves and resembles the shape of the English alphabet 'T' as under :

The left hand side is called the 'debit side'. It is indicated by 'Dr.' (abbreviation for debit) on the left hand top corner of the account. The right hand side, known as the 'credit side', is indicnted by 'Cr.' (abbreviation for credit) on the right hand top comer of the account. The name of the account is written at the top in the centre. The ward 'Ac-count' or its abbreviadon 'Ah' is added to the nanie of the account. For example, if the account is related to machinery, it is written as 'Machinery Accounl'.

1.6 CLASSIFICATION OF ACCOUNTS  

All business transactions are broadly classified into three categories: (i) those relating to persons, (ii) those relating to property (assets), and (iii) those relating to incomes and - expenses. Thus, three classes of accounts are maintained for recording all business transactions. They are: (i) Personal Accounts (ii) Real Accounts, and (iii) Nominal Accounts. Real and Nominal Accounts taken together are called Impersonal Accounts.

Personal Accounts: Accounts which show transactions with persons are called 'Personal Accounts'. A separate account is kept in the name of each person for recording the benefit! recehed from, or given to, the person in the courseof dealings with him. Examples are: Krishna's Account, Gopal's Account, Loan from Ratmlal's Account, etc. 

Personal accounts also include accounts in the names of fums, companies or institutions such as Hiralal & Sons' Account, Nagarjuna Finance Limited Account, The Andhra Bank Account, etc. 

'The accounts which represent expenses payable, expenses paid in i~tlvance, incomes receivable, and incomes received in advance are also personal accounts, though impersonal in name. For example, the salaries due to employees, which have not been paid before closing of the books of account for the year, aie recorded in 'Salari,es Outstanding Account'. It is regarded as a personal account because it represents he employees to whom salaries are payable by the business. Such a personal account is,called 'Representative Personal Account'. Other examples of representative prsonal accounts are: Interest Outstanding Account, Prepaid Insurance Account, Rent Received in Advance Account, etc. Capital Account and Drawings ~ccount are also treated as personal accounts as they show dealings with the owner of the business. 

Real Accounts: Accounts relating to properties or assets are known as 'Real Accounts'. Every business needs assets such as machinery, furniture, etc. for running its activities. A .. separate account is maintained for each asset owned by the business. All transactions , relating to a particular asset are recorded in the concerned asset account. Cash Account, Fumiture Account, Machinery Account, Building Account, etc., are some examples of real ' accounts. They are known as real accounts because they represent things of value owned by the business. 

Nominal Accounts: Accounts relating to expenses, losses, incomes Ad gains are known as 'Nominal Accounts'. A separate account is maintained for each item of expense, loss; income or gain. Wages Account, Salaries Account, Commission Received Account, and Interest Received Account are some examples of nominal accounts. 

  1'7 RULES OF DEBIT AND CREDIT

You have learnt that every transaction affects two accounts and according to Double Entty I System, entries have to be made in both the accounts. Before recording a transaction, I therefore, it is necessary to find out which of the two accounts is to be debited and which is , to be credited. The general rule, as stated earlier, is to debit the account which involves a receiving aspect and credit the account which involves a giving aspect. But, for I convenience, three different rules have been laid down for the three classes of accounts. 1 These are as follows :

1         For Personal Accounts: The account of the person receiving benefit (receiver) of the transaction (from the business) is debited and the account of the person givirig the " '* benefit (giver) of the transaction (to the business) is credited. Thus, the rule L 'debit 1 ,, the rmiver and crcdlt the 'giver9. '

2         For Real Accounts: When an asset is coming into the business, the accdunt of that . asset is debited. When an asset is going out of the business, the account of that met is  cndited. Thus, the rule is 'debit what comes in and credit what goesout'

3        For Nominal Accounts: When ar~ expense is incurred or loss suffered, the account I representing the expense or the loss is debited because the budness receives the benefit ' thereof. When any income is earned or gain made, the account representing the income , or the gain is credited. This is hause the business gives some benefit. Thus, the rule is ' 'debit all expenaes and lossee and credit all incomes and gins'.

We shall now see the appjisaii~~of tbaserules, i&ing a few transactions.

Example 11 : Paid casi~ to Wamesh B Co. Rs. 5,008.

la this case the two accoullts affected are Rarnesh & Cur's Account arid Cash Account. Ramesh & CO.;~ Account is a personal account and Cash Account is a real account. Rameshr $b Co. has received the benefit (cad Rs. 5,006) from the brtsiness and, therefofe, it has td be debited as per the first pzrt of the rule for personal accounts 'debit the receiver'. As cash has gone out, Cash Account will be credited acc~rding to the second part of the rule for red accounts 'credit what goes out'.  

Example 2: Received sash from Ajay Rs. 1,000. 

 In this case Cash Account and Ajay's Account are the two accounts affected. Cash Account is a red account anld Ajay's account is a prsori~l account. As cash has come in, Cash Account will have to be debited according to the first part of the rule for real accounts 'debit , what comes in'. .4jay has given the bendit (cash Rs. 5,000) to the busiriess and, therefore, ' his account will liave to be credited as per the second part of the rule for personal accounts 'credit the giver'. 

Example 3: hid rent Rs. 1,000.

 In this case, the accounts affected are Rent Account aid Cash Account. Rent Account is a norninal'account and Cash Account is a red account. As per the first part of the rule for nominal accoatnis 'debit expenses and losses', Rent Account will have to he debited as it is an expense to tllc business. As cash haa gone out, Cash Account will have to be creditcd according to the secotid part of the rule for real accounts 'credit what goes out'. 

Example 4: Received Rs. 450 as cumn~issisn, 

 In this case, Cash Account and Commission Account arc the two accounts affected, Cash Account is a real account and Comrt~ission AcGo~~~I~ is a nominal account. As cash has come in, Cash Account will liave to be debited according ro the kst part of the rule for real accounts 'debit what cotnes iri'. As pet second pa,d of the rule for non~inal accounts, 'credit I incomes and gains', Commission Accouitt will be credited as it is an illcome to the business. 

You have seen that the diree n~les of debit and credit as explained above, make it convenient for you to analyse the transactions and identify the accounts to be debited and-.-.- . credited.

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