what are the kinds of accounts? what are the rules of making journal entries in them.
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Answer:
- First: Debit what comes in, Credit what goes out.
- Second: Debit all expenses and losses, Credit all incomes and gains.
- Third: Debit the receiver, Credit the giver.
Answered by
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ANSWER :
- ❖ Accounts are classified on the basis of two approaches namely, English Approach or Traditional Approach and American Approach or Modern Approach.
❒ The classification of Accounts under English Approach or Traditional Approach are as follows :-
- [1] Personal Accounts : Accounts heads pertaining to persons, firms, companies, organizations etc. are called Personal Accounts. It includes the accounts such as Ram's A/C, Gauhati Commerce College A/C etc.
- [2] Real Accounts : Accounts heads recording transactions relating to tangible things are known as Real Accounts. It includes the accounts of Machinery A/C, Cash A/C, Building A/C, Bank A/C etc.
- [3] Nominal Accounts : Accounts heads recoding transactions relating to losses, expenses, incomes and gains are known as Nominal Accounts. It includes Wages A/C, Rent A/C, Salaries A/C, Miscellaneous Expense A/C etc.
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❒ The classification of Accounts under American Approach or Modern Approach are as follows :-
- [1] Assets Account : Assets account are the accounts of assets and properties of the business entity. These include land, building, plant, machinery, patents, cash in hand, cash at bank, debtors etc.
- [2] Liabilities Account : Liabilities accounts are the accounts pertaining to the liabilities of the business entity. These include lenders, creditors, outstanding expenses, bank overdraft etc.
- [3] Capital Account : Capital is the amounth with which the business is started. It is the account of the owner who invests money in the business as capital. Owner's Capital as well as Drawings are included in this head of account.
- [4] Revenue Accounts : Revenue accounts are the accounts of income and gains. These include sales, discount received, interest received, commission received etc.
- [5] Expense Accounts : Expenses accounts are the accounts of expenses incurred and losses sufferef by the entity. These include purchases. wages paid, rent paid, depreciation charged etc.
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❒ There are three main steps involved in the process of journalizing a transaction explained below :-
- [1] Identification of Accounts or Account Heads affected by the transaction : The first step involved in the process of journalising is the identification of accounts or account hates affected by a particular transaction. As per the Double Entry System, each transaction has two aspects. So, in order to journalise the transaction, the accounts or account head affected by the transaction is to be identified.
- [2] Classification of Accounts or Account Heads : The next step involved in the process of journalising is the classification of the identified accounts or accounts heads. There are two approaches for classification : (i) Traditional or English Approach and (ii) Modern or American Approach. In this step, the identified accounts affected by the transaction are classified into different account groups on the basis of either Traditional (English) Approach or Modern (American) Approach.
- [3] Application of rules for Debit and Credit : The third step involved in the process of journalising is the application of debit and credit rules to the identified accounts (or account heads) affected by the transaction as per either Traditional (English) Approach or Modern (American) Approach. There are some rules for debit and credit of accounts under Traditional (English) Approach as well as under Modern (American) Approach. Therefore, in order to journalise the transaction, respective rules for debit and credit is applied in this step.
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❒ Rules of Debit and Credit under Traditional Approach or English Approach :-
[1] For Personal Accounts :
- ★ Debit is the Receiver of the benefit.
- ★ Credit is the Giver of the benefit.
[2] For Real Accounts :
- ★ Debit what Comes in.
- ★ Credit what Goes out.
[3] For Nominal Accounts :
- ★ Debit all Expenses and Losses.
- ★ Credit all Incomes and Gains.
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❒ Rules of Debit and Credit under American Approach or Modern Approach :-
[1] For Assets Accounts :
- ★ When there is an increase in the Asset, it is 'Debited'.
- ★ When there is a decrease in the Asset, it is 'Credited'.
[2] For Liabilities Accounts :
- ★ When there is an increase in the Liabilities, it is 'Credited'.
- ★ When there is a decrease in the Liabilities, it is 'Debited'.
[3] For Capital Accounts :
- ★ When there is an increase in the Capital, it is 'Credited'.
- ★ When there is a decrease in the Capital, it is 'Debited'.
[4] For Revenue Accounts :
- ★ When there is an increase in the Revenue, it is 'Credited'.
- ★ When there is a decrease in the Revenue, it is 'Debited'.
[5] For Expenses Accounts :
- ★ When there is an increase in the Expense, it is 'Debited'.
- ★ When there is a decrease in the Expense, it is 'Credited'
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