TRADITIONAL CLASSIFICATION OF ACCOUNTS

TRADITIONAL CLASSIFICATION OF ACCOUNTS:

a)       Personal Accounts:-These accounts relate to natural persons(Ram, Mohan etc.), artificial/ Legal persons( Govt. companies, Clubs, co-operative societies etc and representative persons( capital a/c, Drawing A/c, Prepaid a/c, outstanding exp A/c.

b)      Impersonal Accounts:

i.         Real Accounts:- These accounts relate to the tangible or intangible real assets (i.e. accounts of properties and assets): and

ii.       Nominal Accounts:-These accounts relate to incomes, expenses or losses.

 

RULES( imp):—The following three are the basic rules ( traditional method)for recording the transaction:—

  1. Personal Accounts              :-               Debit the receiver and credit the giver.
  2. Real Accounts                        :-               Debit what comes in and credits what goes out.
  3. Nominal Accounts               :-               Debit all exp. (and losses) and credit all incomes & gains.

The left-hand side of an account is called the debit side and the right-hand side of an account is called credit side.

·                                               ACCOUNTING EQUATION BASED CLASSIFICATION:

1. Assets Accounts

Ø  These accounts relate to tangible or intangible real assets. Eg. Land A/c, Building A/c, Patents, Goodwill, trademark etc.

2. Liabilities Accounts

Ø  These accounts relate to the financial obligations of an enterprise towards outsiders. Eg. Trade Creditors, Bills Payable, Bank Overdraft, Loans, Outstanding Exp. etc.

3. Capital Accounts

Ø  These accounts relate to owners of an enterprise.

Eg. Capital A/c, Drawings A/c.

4. Revenue Accounts

Ø  These accounts relate to the amount charged for goods sold or services rendered or permitting others to use enterprise’s resources yielding interest, royalty or dividend. Ex. Sales A/c, Discount Received A/c, Dividend Received A/c, Interest Received A/c.

5. Expenses Accounts

Ø  These accounts relate to the amount incurred or lost in the process of earning revenue. Ex. Purchase A/c, discount allowed A/c, Royalty paid A/c, Interest Payable A/c, Loss by Fire A/c etc.

 

Distinction between Real Account and Nominal Account

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#TRADITIONALCLASSIFICATIONOFACCOUNTS

Real Account

Nominal Account

ð  These accounts relate to properties of the business.

ð    These accounts relate to expenses, losses, income and gains.

ð  These accounts are shown in Balance Sheet.

ðThese accounts are shown in profit and loss account.

ð  Closing balances of these accounts are carried over to the next year as opening balances.

ð    Closing balance of these accounts are closed by transfer to profit and loss account.

ð  These accounts indicate financial position of the business.

ð    These accounts assist in calculating profit and loss of the business.

ð  As per double entry rule, property received is debited and property given is credited.

ð    As per double entry rule expenses and losses are debited and income and gains are credited.

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