All transactions are recorded initially in the journal. This is termed as journalizing the entries. Journalizing is done on the basis of debit and credit. For this purpose, accounts are classified into three groups or categories under traditional approach.
Personal Accounts: Transactions related to persons, organizations etc. are treated as personal accounts. Examples include Robert A/c, Government A/c, Bank A/c, Club A/c, Debtors A/c, Creditors A/c etc. Representative personal accounts such as prepaid insurance, outstanding salaries, capital account, drawing account etc., also come under this category.
Accounting Treatment: For personal accounts, receiver is debited and giver is credited.
Example: Ram paid $100 to Robert.
Robert A/c Dr. $100
To Ram A/c $100
(Being $100 is paid to Robert by Ram)
Explanation: Here Robert is receiving the money; hence his account is debited and Ram is giving that's why his account is credited.
Real Accounts: All asset accounts except debtors account are treated as real accounts. Example: building, plant and machinery, cash in hand, cash at bank etc. Bank Account i.e. the name of bank like World Bank, Axis Bank etc., is personal account, but cash at bank is a real account.
Accounting Treatment: For real accounts, 'what comes in' is debited and 'what goes out' is credited.
Example: Machinery purchased for $300
Machinery A/c Dr. $300
To Cash A/c $300
(Being machinery purchased for $300)
Explanation: Here machinery is coming in, hence this account is debited and cash is going out, that's why it is credited.
Nominal Accounts: All expenses and losses, gains and incomes come under this category.
Accounting Treatment: For nominal accounts, all expenses and losses are debited and all gains and incomes are credited.
Example: Salaries paid for $100 and rent received for $100
Salaries A/c Dr. $100
To Cash A/c $100
(Being salaries of $100 paid)
Explanation: Here salaries are paid; they are expenses hence the account is debited. Cash is a real account, it is going out hence it is credited.
Cash A/c Dr. $100
To Rent A/c $100
(Being rent received for $100)
Explanation: Here cash is coming in; hence cash account is debited. Rent received is an income that's why it is credited.
Personal Accounts: Transactions related to persons, organizations etc. are treated as personal accounts. Examples include Robert A/c, Government A/c, Bank A/c, Club A/c, Debtors A/c, Creditors A/c etc. Representative personal accounts such as prepaid insurance, outstanding salaries, capital account, drawing account etc., also come under this category.
Accounting Treatment: For personal accounts, receiver is debited and giver is credited.
Example: Ram paid $100 to Robert.
Robert A/c Dr. $100
To Ram A/c $100
(Being $100 is paid to Robert by Ram)
Explanation: Here Robert is receiving the money; hence his account is debited and Ram is giving that's why his account is credited.
Real Accounts: All asset accounts except debtors account are treated as real accounts. Example: building, plant and machinery, cash in hand, cash at bank etc. Bank Account i.e. the name of bank like World Bank, Axis Bank etc., is personal account, but cash at bank is a real account.
Accounting Treatment: For real accounts, 'what comes in' is debited and 'what goes out' is credited.
Example: Machinery purchased for $300
Machinery A/c Dr. $300
To Cash A/c $300
(Being machinery purchased for $300)
Explanation: Here machinery is coming in, hence this account is debited and cash is going out, that's why it is credited.
Nominal Accounts: All expenses and losses, gains and incomes come under this category.
Accounting Treatment: For nominal accounts, all expenses and losses are debited and all gains and incomes are credited.
Example: Salaries paid for $100 and rent received for $100
Salaries A/c Dr. $100
To Cash A/c $100
(Being salaries of $100 paid)
Explanation: Here salaries are paid; they are expenses hence the account is debited. Cash is a real account, it is going out hence it is credited.
Cash A/c Dr. $100
To Rent A/c $100
(Being rent received for $100)
Explanation: Here cash is coming in; hence cash account is debited. Rent received is an income that's why it is credited.
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