Learning objectives

This chapter would enable you to understand :

Chapter 6
 Meaning of an Account
Accounting  Meaning of Debit and Credit
Procedures  Rules of Debit and Credit
 Classification of Accounts
 Balancing an Account
 Significance of Debit and Credit Balance in
Accounts .
 Transactions are recorded in the books of account on the
basis of evidences i.e source documents, such as invoices for
purchases invoices for sales, debit and credit notes etc.

Rules of debit and credit are applied to each transaction and

recorded in the books of original entry i.e Journal or Special
Accounting purpose books in the chronological order .

The transactions recorded in the books of account are

Procedure transferred (posted) to the special account maintained in the
Ledger .

Concept Recording……. Journal

Classifying…….. Ledger
What is an Account?

 Account is a summarized record of transactions under a particular head. It records not only the amount of
transactions but also their effect and direction .

 An Account is divided into two parts i.e debit and credit. It is usually in a “T” form and the commonly used
layout of an account is as follows :
 Debit refers to the left An item recorded on the
side of an account and debit side of an account
Credit refers to the right is said to be debited to
side of an account . the account .

Both debit and credit

Meaning of Debit
An item recorded on the
may represent either
credit side of an account
increase or decrease
is said to be credited to
depending upon the
and Credit the account .
nature of an account .

The rules of debit and

credit depend on the
nature of account.
 Classification of Accounts

Traditional Approach Modern Approach

CLEAR
Personal  Capital
 Liability
 Expense
 Asset
 Revenue
Impersonal
Traditional Approach

Personal Accounts
Accounts which related to
persons i.e., individuals, firms,
companies, debtors or creditors
etc., are Personal Accounts.
Eg: Ram & Co. , Capital
account and Drawings Account
etc..
Personal Account can be classified into three categories :
(i) Natural Personal Accounts: The term ‘Natural Persons’
means persons who are creations of God.Therefore, these
will include accounts in individual name.
Example: Ram’s Account, Asha’s Account etc.
(ii) Artificial Personal Accounts: These accounts include
accounts of corporate bodies or institutions which are recognised
as persons in business dealings.
Example: The account of a limited company , the account of a
club or a corporative society etc.
(iii)Representative Personal Account: These are accounts
which represent a certain person or a group of persons.
Example: Outstanding salary ,Prepaid rent ,Commission received
in advance, Accrued interest

Impersonal Accounts
Accounts which are not
personal such as Machinery
account, Cash account, Rent
account, etc., are termed as
Impersonal Accounts.
Impersonal Account can be classified into two
categories:
(i) Real Accounts: Real accounts are the accounts
which related to tangible or intangible assets of
the firm(excluding Debtors)
Example
Tangible assets: Land Account, Building Account,
Stock Account, Cash Account etc.
Intangible assets: Goodwill Account, Patent Account,
Trademarks Account.
(ii) Nominal(Revenue or Expense) Accounts:
Accounts which related to expenses, losses, gains,
revenue etc., are termed as Nominal Accounts.
Example: Salary Account, Commission Received,
Sales Account, Purchase Account etc.
 The net result of all the Nominal Accounts is profit or loss
which is transferred into the Capital Account .
 1. Personal : Debit the Receiver,
Credit the giver.
Traditional
Approach
2. Real : Debit what comes in,
Credit what goes out.
Rules of Debit
and Credit 3. Nominal : Debit all expenses and Losses,
Credit all incomes and
gains.
 Modern Approach

Under this approach all the accounts are classified into the following Five categories.

 Liability
 Income & gains
 Capital

 Asset
 Expense
Modern Approach
Rules of Debit and Credit

Dr L Cr
A
I
E
C Dr
Cr
 • At the end of a period(say a day, month or a year), it may be
necessary to know the balance in an account .

• A Balance of an account is the difference between the total

Balancing an of its debit and credit sides.

Account • If the total of debit side is more than the total of credit
side, the account is said to have a debit balance .

• If the total of credit side is more than the total of debit

side, the account is said to have a credit balance.
 Total the two sides (i.e.,Debit and Credit)of
Total the account .

Process of Calculate Calculate the difference in totals of the two

sides. The difference is the balance .
Balancing

Enter the difference in the side with a shorter

Enter total . Now the total of two sides will match.