Unit-4 Accounting Process and Rules

This unit explains stages in accounting process, different classes of accounts, the principle of double entry, and the rules of debit and credit.

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Ram had the following transactions. Determine that accounts to be debited and credited:                                                                                                                    

a)Command business with cash                                                                        1,00,000

b)Purchased goods for cash                                                                               15,000

c)Paid for advertisement                                                                                      600

d)Bought goods from P & Co. on credit                                                             20,000

e)Sold goods for cash                                                                                          6000

f)Sold goods to Z on credit                                                                                 12,000

g)Paid commission                                                                                                900

h)Paid salaries                                                                                                        8000

i)Paid rent                                                                                                               600

j)Loan taken from Hirala                                                                                        50,000

From the following transactions determine the accounts affected, classify them and state whether it is to be debited or credited.                                                                                              Rs.

a) Purchased typewriter for cash                                                                                    5,000

b) Purchased furniture from R & Co. on credit                                                               50,000

c) Interest received                                                                                                         300

d) Paid wages                                                                                                                 800

e) Received cash from A                                                                                                 2,000

f) Additional capital introduced into the business                                                            5,000

g) Paid cash to B                                                                                                             1,500

h) Paid carriage                                                                                                               200

i) Purchased goods from F & Co. on credit                                                                    12,000

j) Sold goods for cash                                                                                                     1,400

What is account? Describe the various classes of accounts with examples.

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Learning Pundits Content Team

Written on Apr 17, 2019 5:13:25 PM

An account is a summarized record of the effect of all transactions relating to a particular person or an item.

An account 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 writing 'Dr.' (abbreviation for debit) on the left hand top corner of the account.

The right hand side known as the 'credit side', is indicated by writing 'Cr.' (abbreviation for credit) on the right hand top corner of the account.

The name of the account is written at the top in the center. The word 'Account' or its abbreviation 'A/c' is added to the name of the account. 

All business transactions can broadly be classified into three categories:

  • Those relating to persons
  • Those relating to property (assets)
  • Those relating to incomes and expenses.

Hence, it becomes necessary to keep an account for each person, each asset, and each item of income and expense.

Thus, three classes of accounts are maintained for recording all business transactions.

They are:

  • Personal Accounts
  • Real Accounts
  • Nominal Accounts. Real and Nominal Accounts taken together are called Impersonal Accounts.

Personal Accounts:

Accounts which show 'dealings with persons are called 'Personal Accounts’.

Such dealings may relate to credit purchases of goods or credit sales of goods or loans taken, etc.

A separate account is kept in the name of each person for recording the benefits received from, or given to, the person in the course of dealings with him. - Examples are: Krishna's Account, Gopal's Account, Loan from Ratanlal Account , etc.

Personal accounts also include accounts in the names of institutions or companies (called artificial persons) such as Indian Bank Account, Nagarjuna Finance Limited Account, the Andhra Pradesh Paper Mills Limited Account, etc.

The accounts which represent expenses payable, expenses paid in advance, incomes receivable, and incomes received in advance are also personal accounts, though impersonal in name.

Personal Accounts:

For example, when salaries are due to the employees, but not paid before closing of the books of account for the year, an account called 'Salaries Outstanding Account' will be opened in the books.

The Salaries Outstanding Account is regarded as a personal account representing the employees to whom salaries are payable by the business.

Such a personal account is called 'Representative Personal Account' as it represents a particular person or a group of persons.

Other examples is of representative personal accounts are: Interest Outstanding Account, Prepaid Insurance Account, Rent Received in Advance Account, Commission Outstanding Accounts , etc.

Capital Account and Drawings Account are also treated as personal accounts as they represent 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.

In book-keeping, a separate account is maintained for each asset owned by the business.

Dealings relating to purchase or sale of the asset are recorded through this account. Furniture Account, Machinery Account, Building Account, etc., are some examples of real accounts.

Cash Account which shows receipts and payments of cash is also a real account. They are known as real accounts because they represent things of value owned by the business.

Nominal Accounts:

Accounts relating to expenses, losses, incomes and gains are known as 'Nominal Accounts’.

Every business unit incurs certain expenses such as payment of salaries to employees, payment of wages to workers, etc., while carrying out its activities.

It may also suffer losses such as loss by fire, loss by theft, etc.

It may also earn certain incomes and gains such as receipt of commission, receipt of interest, profit on sale of an asset, etc.

A separate account is maintained for recording each item of expense, loss, income or gain.

Thus, Wages Account, Salaries Account, Commission Received Account, and Interest Received Account are all nominal accounts.

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