What is account? Traditional Classification of Account

What is Account?

The term “Account” is a record in summarized and classified form of all business transactions that take place between particular person and things specified. Account is the root of accounting.

Classification of accounts:

To record a transaction in the books of account, the first thing to do is to ascertain which account is to be debited and which account is to credited. In order to ascertain this correctly, a clear idea about the different classes of accounts is essential. Accounts may be divided into the following classes.

1. Personal accounts:

Accounts relating to persons or firms are called personal accounts personal accounts can take the following forms:

i.                    Natural person’s accounts: for examples Ali’s, Aslam’s account etc

ii.                  Artificial person’s accounts: for example HabibBanks A/c

iii.                Representative personal accounts: when an account represents certain person or persons then it is called a representative personal account. For example if a business is not able to pay salary for the last two month to the workers then the workers will be treated as creditors of the business. Salary outstanding, unexpired insurance account, Rent prepaid account are representative accounts.

2. Real or property accounts:

Accounts of properties and things are those which keep records of properties or things owned by a business. E.g. Machinery a/c, Land a/c, building a/c, cash a/c etc. these accounts have existence and they are tangible, therefore, called Real accounts.

3. Nominal accounts:

Accounts of gains and losses are those that record expenses, gains and losses such as salary, wages, rent etc. these accounts have no existence except only in name and are therefore, called Nominal.

4. Valuation accounts:

These are the account of provision for depreciation and provision for doubtful debts.

Rules for Debit and Credit

Type of account	Account to be debited	Account to credited
1.      Personal account	Receiver	Giver
2.      Real account	What comes n	What goes out
3.      Nominal account	Expense and loss	Income and gain
4.      Valuation account	When account to be decreased	When account to be increase