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
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
A typical chart of accounts has five primary types of accounts:
- Assets.
- Liabilities.
- Equity.
- Revenue.
- Expenses.
What are the different types of accounting?
- Tax accounting.
- Financial accounting.
- Management accounting.
- Cost accounting.
- Forensic accounting.
- Governmental accounting.
- International accounting.
- Auditing.
What is accounting terminology? Accounting terminology is the language of accounting. It is used to describe accounting concepts and terms such as income, expenses, assets and liabilities etc. These concepts are all essential elements in understanding how accounting works.
What is dictionary chart of accounts? ›
A chart of accounts (COA) is an index of all of the financial accounts in a company's general ledger. In short, it is an organizational tool that lists by category and line item all of the financial transactions that a company conducted during a specific accounting period.
What are the basic accounting categories? ›
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.
How to classify accounts in accounting? ›
Accounts are classified in accounting using one of two methods: the current approach or the classic approach. The accounts are classified as asset accounts, liability accounts, capital or owner's equity accounts, withdrawal accounts, revenue/income accounts, and expense accounts, according to the modern approach.
What is the basic accounting term? ›
Basic accounting concepts used in the business world cover revenues, expenses, assets, and liabilities. These elements are tracked and recorded in documents including balance sheets, income statements, and cash flow statements.
What is the vocabulary of account? ›
An account can be many things — such as a story, like if you give a friend an account of what happened at the party she missed. It can also be a business arrangement, like a bank account or an email account. Account is one of those seemingly simple words that have a mass of different meanings.
What are the 5 basic charts of accounts? ›
The chart of accounts (CoA) is an index of all financial accounts in a company's general ledger. There are 5 major account types in the CoA: assets, liabilities, equity, income, and expenses.
What is a GL account? ›
What is a general ledger (GL)? A general ledger (GL) is a set of numbered accounts a business uses to keep track of its financial transactions and to prepare financial reports. Each account is a unique record summarizing a specific type of asset, liability, equity, revenue or expense.
A chart of accounts (COA) is a list of all the accounts you must use to record financial transactions in your general ledger. It helps you keep track of where money comes from and goes.
What are the 5 main things in accounting? ›
Five main types of accounts appear in a COA: assets, equity, expenses, liabilities, and revenues.
What are the 5 accounting groups? ›
The 5 primary account categories are assets, liabilities, equity, expenses, and income (revenue)
What are the 3 main types of accounting? ›
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.
