Account Types or Kinds of Accounts :: Personal, Real, Nominal

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Elements in Accounting/Accounts » Account Heads

 
 

• Element

  • Meaning = A small part of the total whole
  • Synonyms » constituent, part, building block, component, ingredient, factor, aspect

• An Element in accounting

An element for the purpose of accounting is that aspect relating to which we wish to find/know information.
Each element in accounting is identified as an account or an accounting head.

» Some examples of accounting elements

We wish to know
  • The amount of capital invested in the business.

    • Capital is an element. — We identify it as Capital a/c.

  • The value of Furniture with us in the business.

    • Furniture is an element. — We identify it as Furniture a/c.

  • The amount of expenditure on account of salaries.

    • Salaries is an element. — We identify it as Salaries a/c.

  • The amount due to us from Mrs. Vimla.

    • Mrs. Vimla is an element. — We identify it as Mrs. Vimla's a/c.

  • The amount we owe the wholesaler Mr. Rathod.

    • Mr. Rathod is an element. — We identify it as Mr. Rathod's a/c.

  • The amount available in the bank.

    • Bank is an element. — We identify it as Bank a/c.

  • The value of sales made by us.

    • Sales is an element. — We identify it as Sales a/c.

  • This list can be endless...........

Types/Kinds of Accounts

 
 
All the accounting heads used in an organisational accounting system are divided into three kinds/types.

• Personal Accounts

The elements or accounts which represent persons and organisations.

• Real Accounts

The elements or accounts which represent assets

In the initial stages of learning accounting, we can assume real accounts to be those related to tangible aspects.

» Tangible/Touchable

Capable of being perceived by the senses or the mind; especially capable of being handled or touched or felt.

There are assets which are intangible like the organisations Goodwill.
[At this stage of the learning process, please ignore the presence of such assets.]

• Nominal Accounts

The elements or accounts which represent expenses, losses, incomes, gains.

• An Account should be one of the three

Any element or account used in an organisational accounting system should be one of these.

Thus, we can say that if an account is not real or personal it should be a nominal account.

Therefore we may also interpret

  • Nominal accounts as, the accounts other than Personal and Real accounts
  • Real accounts as, the accounts other than Personal and Nominal accounts
  • Personal accounts as, the accounts other than Real and Nominal accounts

Types/Kinds of Accounts in "Capital + Liabilities = Assets"

 
 
Consider the accounting equation relating to an organisation at , at any stage

Capital+Liabilities=Assets
1,00,000 + Mr. Shyam Rao (5,000) = Cash (13,000) + Furniture (25,000) + Stock (5,000) Bank (60,000)
+ M/s Bharat & Co (2,000)

Notice that the assets side is made up of Real a/c's and the Liabilities side is made up of Personal a/c's.

  • Capital a/c represents the owner of the business and therefore is a Personal account.
  • All other liabilities imply the amounts we owe to others (persons or organisations) and thus are personal accounts.

How many Elements/Accounting-Heads are used in accounting?

 
 
The number of elements i.e. accounting elements used for the purpose of accounting for an organisation is not a static figure. It is dependent on the amount and nature of information needed by the organisation.

Where the organisation needs less detail, it may consider all the expenses as a single element called expenses (i.e. Expenses a/c). Where the organisation feels that it needs greater detail with regard to expenses, it may sub divide it into smaller elements as Salaries a/c, Rent a/c, Telephone Charges a/c, Miscellaneous Expenses a/c. All these together would form the total expenditure of the organisation.

We interpret the number of elements used for the purpose of accounting as "the number of elements into which an organisation is divided for the purpose of accounting". This is dependent on the amount of information that an organisation needs.

Greater the information needed, greater the number of accounting heads i.e. the number of elements into which the organisation is divided.

• The more the information we need,
    The more the accounting heads we have to maintain.
(Or)
• The more the information we need,
    The more the number of elements into which we need to divide the organisational accounting.

Minimum Accounting Heads in an Accounting System

 
 
Whatever may be the number of accounting heads/elements an organisational accounting is divided into, it should/will contain all the three types of accounts i.e. Real a/c's, Nominal a/c's and Personal a/c's.

Where the information needed by the organisation is very minimal, it can account for the transactions relating to its business with a minimum of four accounting heads.

• Assets and Liabilities

» Assets a/c

All the assets whatever they may be shall be considered under a single head named Assets a/c

» Liabilities a/c

All liabilities shall be considered under a single head Liabilities a/c (which includes capital).

• Incomes/Gains and Expenses/Losses

Every organisation has to deal with incomes/gains and expenses/losses.

» Expenses/Losses a/c

All the expenses/losses whatever they may be are considered under a single head Expenses/Losses a/c.

» Incomes/Gains a/c

All the incomes/gains whatever they may be are considered under a single head Incomes/Gains a/c.

• Minimum Five Account Heads

The liabilities are acquired from two sources owners and others. The capital acquired from the owners takes the total risk in the business and is different in characteristic from the capital acquired from others.

Thus to have a clear and better understanding/information regarding liabilities, the Liabilities a/c is replaced by two accounts: Capital a/c and Liabilities a/c. [The more the information we need the more the accounting heads we have to maintain]

Therefore, the minimum accounting heads to be maintained would be 5 i.e. Capital a/c, Liabilities a/c, Assets a/c, Expenses/Losses a/c, Incomes/Gains a/c.

Elements effected by a transaction » Identifying Account type

 
 
Your ability in accounting is directly proportional to your ability in analysing a transaction and identifying the two elements affected by the transaction (without considering the accounting equation).

After identifying the two elements affected by the transaction we identify the nature/type of the two elements i.e. whether the elements affected are real, personal or nominal accounts.

» Illustration :

Considering the same example (as in the previous page) of business transactions relating to the business of Mr. Oberoi .
  1. The business is proposed to be started.

    There are no elements affected by this transaction since it is not a transaction to be taken into account based on the "Money Measurement Concept".
  2. Started Business with a Capital of Rs. 1,00,000.

    Capital and Cash are the two elements affected by this transaction. Since capital is being brought into the business in cash, the value of Capital increases by Rs. 1,00,000 and the value of cash also increases by Rs. 1,00,000.

    Capital a/c

    Person

    Personal a/c
    Cash a/c

    Tangible aspect/Asset

    Real a/c

  3. Bought Furniture for cash Rs. 25,000.

    Since Furniture is being bought by paying cash, the value of Furniture increases by Rs. 25,000 and the cash available with the business would reduce by Rs. 25,000.

    Furniture a/c

    Tangible aspect/Asset

    Real a/c
    Cash a/c

    Tangible aspect/Asset

    Real a/c

  4. Bought Goods for cash Rs. 25,000 from M/s Roxy Brothers.

    Since goods are bought by paying cash, the value of Goods increases by Rs. 25,000 and the cash available with the business would reduce by Rs. 25,000.

    Goods/Stock a/c

    Tangible aspect/Asset

    Real a/c
    Cash a/c

    Tangible aspect/Asset

    Real a/c

    • Vendor Name irrelevant in Cash Purchase

    Though the goods have been purchased from M/s Roxy brothers, their name has no relevance while the transaction is being considered for accounting purposes, since the purchase is for cash.

    When we make a cash purchase, the party from whom the purchase is made is irrelevant unless there is a time gap between the transaction of purchase and transaction of paying cash.

    The vendor's name may also be considered if the organisation intends to have an accounting record of who purchases what and how much, in which case the purchase is recorded as a credit purchase and the due cleared immediately.

  5. Bought Goods from Mr. Shyam Rao on credit for Rs. 10,000.

    Since goods are bought on credit, the value of Goods increases by Rs. 10,000. The liabilities of the business would increase by Rs. 10,000. This liability is identified by the name of the vendor who gave the goods on credit i.e. Mr. Shyam Rao.

    Goods/Stock a/c

    Tangible aspect/Asset

    Real a/c
    Mr. Shyam Rao a/c

    Person

    Personal a/c

  6. Sold Goods for cash Rs. 20,000 to Mr. Peter.

    Since goods are sold by taking cash, the value of Goods has decreased by Rs. 20,000. The cash available with the business would increase from Rs. 50,000 to Rs. 70,000.

    Goods/Stock a/c

    Tangible aspect/Asset

    Real a/c
    Cash a/c

    Tangible aspect/Asset

    Real a/c

    • Buyer Name irrelevant in Cash Sale

    Though the goods have been sold to Mr. Peter, his name has no relevance while the transaction is being considered for accounting purposes, since the sale is for cash.

    When we make a cash sale, the party to whom the sale is made is irrelevant unless there is a time gap between the transaction of sale and transaction of receiving cash.

    The buyer's name may also be considered if the organisation intends to have an accounting record of who bought what and how much, in which case the sale is recorded as a credit sale and the due cleared immediately.

  7. Sold Goods on credit to M/s Bharat & Co., for Rs. 10,000.

    Since goods are sold on credit, the value of Goods decreases by 10,000. A new asset in the form of a debtor (those who owe us) is created. The new asset is identified by the name of the organisation which purchased the goods on credit i.e. M/s Bharat & Co.

    Goods/Stock a/c

    Tangible aspect/Asset

    Real a/c
    M/s Bharat & Co. a/c

    Organisation

    Personal a/c

  8. Paid Cash into Bank Rs. 60,000.

    Since cash is paid into bank, the available cash reduces by Rs. 60,000 and the amount of balance in the bank increases by Rs. 60,000. The amount paid into the bank is held by the bank on our behalf. The bank has to pay us the same whenever we ask for it. The bank therefore stands in the position of a debtor to us (those who owe us money).

    The new asset is identified as "Bank" if there is only one bank account. Where there are more than one bank account, each bank is identified by its name.

    Cash a/c

    Tangible aspect/Asset

    Real a/c
    Bank a/c

    Organisation

    Personal a/c

  9. Paid Cash to Mr. Shyam Rao, Rs. 5,000.

    Since cash is paid to Mr. Shyam Rao, the available cash reduces by Rs. 5,000 and the liability in the name of Mr. Shyam Rao (the amount due to him) also reduces by Rs. 5,000.

    Cash a/c

    Tangible aspect/Asset

    Real a/c
    Mr. Shyam Rao a/c

    Person

    Personal a/c

  10. Received cash from M/s Bharat & Co., on account, Rs. 8,000.

    Since cash is received from M/s Bharat & Co., the available cash increases by Rs. 8,000 and the asset in the name of M/s. Bharat & Co (the amount receivable from them) also reduces by Rs. 8,000.

    Cash a/c

    Tangible aspect/Asset

    Real a/c
    M/s Bharat & Co. a/c

    Organisation

    Personal a/c

Practice Problems » Types/Kinds of Accounts

Author Credit : The Edifier ... Continued Page 12

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