Types/Kinds of Accounts :: Personal, Real, Nominal - Illustration

Accounting Transaction » Identifying Elements effected & Account Types

Our ability in accounting is directly related to our ability in analysing a transaction. The better our analysis, the greater our ability. Through the analysis we need to identify the two elements affected by the transaction and should be able to state the nature of the two elements..

We write down a lot of explanation in the initial stages of the learning process just to create an understanding relating to each transaction. All that can be eliminated and only the final answer need be considered.

Illustration - Problem

Identify the elements affected by the transaction given below and also state the nature of the elements
  1. Ibrahim a sole proprietor Commenced business with a capital of 2,00,000.
  2. Bought Furniture for cash 20,000.
  3. Paid Rent to the shop owner Mr. Murugan 5,000.
  4. Paid cash into bank 1,50,000
  5. Bought Goods for cash 10,000 from M/s Shamir Jain & Co.,
  6. Bought Goods on credit from M/s Ramdas & Bros. for 10,000.
  7. Sold goods for cash 12,000 to Mr. Naryan Tiwari
  8. Bought Machinery from M/s Boolani Machinery and paid by cheque 25,000.
  9. Sold goods on credit to Mr. Natekar for 8,000
  10. Paid weekly wages to workers 5,000
  11. Paid M/s Ramdas and Brothers by cheque 5,000
  12. Received from Mr. Natekar 2,000
  13. Received commission from M/s Orion Traders for giving a trade lead 500.

Illustration - Solution

  1. Commenced Business with a Capital of 2,00,000.

    Capital a/c

    Person

    Personal a/c
    Cash a/c

    Tangible aspect/Asset

    Real a/c
  2. Bought Furniture for cash 20,000.

    Furniture a/c

    Tangible aspect/Asset

    Real a/c
    Cash a/c

    Tangible aspect/Asset

    Real a/c
  3. Paid Rent to the shop owner Mr. Murugan 5,000.

    Rent Paid a/c

    Expenditure

    Nominal a/c
    Cash a/c

    Tangible aspect/Asset

    Real a/c

    Payee name irrelevant in recording expenses paid in cash

    The information relating to the expenditure on account of rent is normally recorded using the account head Rent Paid a/c. The amount paid to Mr. Murugan, the shop owner, is towards the rent of the shop and therefore it would result in the organisational expenditure on rent increasing by 2,000. It should not be interpreted as cash paid to Mr. Murugan.

    However, if the rent has been recorded as due earlier, the amount paid now would be treated as the amount due to Mr. Murugan and not Rent.

  4. Paid cash into bank 1,50,000

    Cash a/c

    Tangible aspect/Asset

    Real a/c
    Bank a/c

    Organisation

    Personal a/c
  5. Bought Goods for cash 10,000 from M/s Shamir Jain & Co.,

    Cash a/c

    Tangible aspect/Asset

    Real a/c
    Goods/Stock a/c

    Tangible aspect/Asset

    Real a/c
  6. Bought Goods on credit from M/s Ramdas & Bros. for 10,000.

    M/s Ramdas & Bros. a/c

    Organisation

    Personal a/c
    Goods/Stock a/c

    Tangible aspect/Asset

    Real a/c
  1. Sold goods for cash 12,000 to Mr. Naryan Tiwari.

    Cash a/c

    Tangible aspect/Asset

    Real a/c
    Goods/Stock a/c

    Tangible aspect/Asset

    Real a/c
  2. Bought Machinery from M/s Boolani Machinery and paid by cheque 25,000.

    Bank a/c

    Organisation

    Personal a/c
    Machinery a/c

    Tangible aspect/Asset

    Real a/c

    Cash purchase of Machinery

    Machinery being a tangible aspect is an asset. The information relating to machinery is identified using the account head Machinery a/c. Since it is an asset/tangible aspect it is a Real account. The fact that Machinery has been purchased from M/s Boolani Machinery is irrelevant here since there is no time gap between the transactions of purchase of machinery and payment for it.

    Since a cheque is issued, the amount available in the bank is reduced and not cash. Therefore Bank a/c is affected by the transaction.

  3. Sold goods on credit to Mr. Natekar for 8,000.

    Goods/Stock a/c

    Tangible aspect/Asset

    Real a/c
    Mr. Natekar a/c

    Person

    Personal a/c
  4. Paid weekly wages to workers 5,000

    Cash a/c

    Tangible aspect/Asset

    Real a/c
    Wages a/c

    Expenditure

    Nominal a/c

    Receiver name irrelevant in recording expenses - Wages Paid

    Wages paid is expenditure. Generally, the information relating to this expenditure is maintained using the accounting head Wages Paid a/c. Since this is an expenditure being paid in cash, to whom it is paid becomes irrelevant.
  5. Paid M/s Ramdas and Brothers by cheque 5,000.

    M/s Ramdas & Bros. a/c

    Organisation

    Personal a/c
    Bank a/c

    Organisation

    Personal a/c

    Cheque Payment

    Since the payment is made by cheque the amount available in the bank would be reduced i.e. Bank a/c would be affected and not Cash a/c.
  6. Received from Mr. Natekar 2,000

    Mr. Natekar a/c

    Person

    Personal a/c
    Cash a/c

    Tangible aspect/Asset

    Real a/c
  7. Received commission from M/s Orion Traders for giving a trade lead 500.

    Commission Received a/c

    Income

    Nominal a/c
    Cash a/c

    Tangible aspect/Asset

    Real a/c

    Payer name irrelevant in recording Incomes received in cash

    Commission received is income. Generally, the information relating to this income is maintained using the accounting head Commission Received a/c.

    Since the commission has been received in cash, the fact that it is received from M/s Orion Traders becomes irrelevant. However, if the commission has been recorded as due earlier, the amount received now would be treated as the amount due from M/s Orion Traders and not Commission received.

To avoid ambiguity regarding what information the account head provides, it is always appropriate to use additional words to specify the nature of information.

Note such usage in case of the following above

  • Rent may indicate either rent received or rent paid
  • Commission may indicate either commission received or commission paid
Where we do not specify by using a suffix, we assume that account head to represent an expenditure. This is just a convention and not a rule.
  • Wages, since not specified is treated as an expenditure.

Practice Problems - Types/Kinds of Accounts