According to the double entry system of bookkeeping, there are three types of accounts that help you to maintain an error-free record of your journal entries. Each account type has a rule to identify its debit and credit aspect called as the Golden Rule of Accounting. The accounts are:
- Personal Accounts
- Real Accounts
- Nominal Accounts
Personal Accounts
Ledger accounts that contain transactions related to individuals or other organizations with whom your business has direct transactions are known as personal accounts. Some examples of personal accounts are customers, vendors, salary accounts of employees, drawings and capital accounts of owners, etc.
The golden rule for personal accounts is: debit the receiver and credit the giver.
Example: Payment of salary to employees
In this example, the receiver is an employee and the giver will be the business. Hence, in the journal entry, the Employee’s Salary account will be debited and the Cash / Bank account will be credited.
Real Accounts
The ledger accounts which contain transactions related to the assets or liabilities of the business are called Real accounts. Accounts of both tangible and intangible nature fall under this category of accounts, i.e. Machinery, Buildings, Goodwill, Patent rights, etc. These account balances do not come to zero at the end of the financial year unless there is a sale of the asset or payment made towards a liability or closure or acquisition of the business. These accounts appear in the Balance Sheet and the balances get carried forward to the next financial year.
The golden rule for real accounts is: debit what comes in and credit what goes out.
Example: Payment made for a loan
In this transaction, cash goes out and the loan is settled. Hence, in the journal entry, the Loan account will be debited and the Bank account will be credited.
Nominal Accounts
Transactions related to income, expense, profit and loss are recorded under this category. These components actually do not exist in any physical form but they actually exist. For example, during the purchase and sale of goods, only two components directly get affected i.e money and stock. But, apart from this we may incur profit or loss out of such transactions and we might incur some expenses for these transactions to happen. These secondary components fall under the Nominal Category and the accounts that are in Profit and Loss statement are shown under this category.
The golden rule for nominal accounts is: debit all expenses and losses and credit all income and gains.
Example of Nominal Account: Shipping Charges account and Salary account.
FAQs
There are five main account type categories that all transactions can fall into on a standard COA. These are asset accounts, liability accounts, equity accounts, revenue accounts, and expense accounts. These categories are universal to all businesses.
What is accounting 100 words? ›
Accounting is the process of tracking and recording financial activity. People and businesses use the principles of accounting to assess their financial health and performance. Accounting also serves as a useful way for people and companies to honor their tax obligations.
Is there an accounting dictionary? ›
With its authoritative and straightforward definitions and its wide-ranging coverage, this dictionary is essential for students and professionals in accounting and finance. It is also an ideal source of reference for anyone seeking a clear guide to the often-confusing world of accountancy terms.
How can I learn accounting easily? ›
Step-by-Step Guide
- Step 1: Understanding the Accounting Equation. ...
- Step 2: Familiarize Yourself with Financial Statements. ...
- Step 3: Learning to Record Business Transactions. ...
- Step 4: Posting Journal Entries to the Ledger. ...
- Step 5: Prepare the Trial Balance. ...
- Step 6: Make Adjusting Entries. ...
- Step 7: Prepare Financial Statements.
The three types of accounting include cost, managerial, and financial accounting. Although 3 methods of accounting are both vital to the healthy functioning of a business, they have different meanings and accomplish different goals. Let's dive into each of each below.
What does the GAAP stand for? ›
Generally accepted accounting principles, or GAAP, are standards that encompass the details, complexities, and legalities of business and corporate accounting. The Financial Accounting Standards Board (FASB) uses GAAP as the foundation for its comprehensive set of approved accounting methods and practices.
Is accounting a hard? ›
Earning a degree in accounting can be challenging due to the complex nature of the subject matter, however it is not necessarily categorized as math-heavy. Students who are dedicated, diligent, and hard-working can successfully earn an accounting degree.
What is golden accounting rule? ›
The three Golden Rules of Accounting are- 1) Debit what comes in - credit what goes out. 2) Credit the giver and Debit the Receiver. 3) Credit all income and debit all expenses.
What is an Accountant slang? ›
What is the origin of the viral TikTok trend “I'm an Accountant”? The term “accountant” is algospeak for “sex work”, originating on TikTok as a way to skirt community guidelines and censorship.
What is accounting free dictionary? ›
accounting (usually uncountable, plural accountings) (business) The development and use of a system for recording and analyzing the financial transactions and financial status of an individual or a business. A relaying of events; justification of actions. He was required to give a thorough accounting of his time.
This is the most comprehensive and up-to-date dictionary of finance available. The entries in the new edition cover the vocabulary used in banking, money markets, foreign exchanges, public and government finance, and private investment and borrowing, and much more. The coverage in all areas is wide and international.
How can I pass accounting? ›
Review each lesson before and after class.
- Take notes on the chapter before you go into class.
- Don't be afraid to ask questions. ...
- Take time to review notes after class.
- Revisit anything you are still having trouble with by rereading sections in your textbook or going over notes from the day's lesson.
In short, you can. There are online learning options that can take you through the basics of accounting to help either kick-start your degree or upskill for your career.
Is accounting easy to pass? ›
The overall CPA Exam pass rates hover slightly below 50%. This makes passing the CPA Exam a difficult, but achievable, goal. You'll need to study wisely, set a strategy for managing your time, and call on your support network, but with the right plan and good study materials, you will conquer it.
What are the 5 major accounts define each and enumerate examples? ›
We have 5 basic categories for accounts:
- Asset: Something a business has or owns.
- Liability: Something we owe to a non-owner.
- Equity: Something we owe to the owners or the value of the investment to the owner.
- Revenue: Value of the goods we have sold or the services we have performed.
- Expenses: Costs of doing business.
Big 5 Accounting Firm means any of Xxxxxxxx, Price Waterhouse Coopers, Ernst & Young, Deloitte & Touche, KPMG and each of their respective successors and assigns.
What are 10 examples of personal account? ›
20 Examples Of Personal Account Are:-
- Savings Account.
- Checking Account.
- Credit Card Account.
- Mortgage Loan Account.
- Car Loan Account.
- Student Loan Account.
- Personal Loan Account.
- Investment Account.
