Personal Accounts

• Mrs. Vimla a/c - representing Mrs. Vimla a person.
• M/s Bharat & Co a/c - representing M/s Bharat & Co, an organisation.
• Capital a/c - representing the owner of the business, a person or organisation.
• Bank a/c - representing Bank, an organisation.

Real Accounts

• Cash a/c - representing cash which is tangible.
• Goods/Stock a/c - representing Stock which is tangible.
• Furniture a/c - representing Furniture which is tangible.

Tangible

• Perceptible by the senses especially the sense of touch
• having physical substance and intrinsic monetary value
• palpable
• real
• touchable

In the initial stages of learning accounting, we assume real accounts to be those representing tangible elements. This is because all the elements that we deal with at this stage have that characteristic.

There is no hard and fast rule that all assets should be tangible.

Eg : Goodwill of an organisation is an intangible asset.

There are many other ways the terms Real accounts and the term asset can be interpreted and understood. For now, please, stick to the simple understanding that assets are tangible aspects and are thus identified as real accounts.

Nominal Accounts

• Salaries a/c - representing expenditure on account of salaries, an expense.
• Interest received a/c - representing income on account of interest, an income.
• Loss on sale of Asset a/c - representing the loss incurred on sale of assets, a loss.

  We do not come across such accounts till a later stage of our learning. For now, please, assume that such accounts exist.

• Profit on sale of Asset a/c - representing the profit made on sale of assets, a gain.

  We do not come across such accounts till a later stage of our learning. For now, please, assume that such accounts exist.

Every Account head belongs to one of the three types

We use this property to identify the nature of an account sometimes. Where an account cannot be classified under two types, it should be the third type.

• Nominal accounts are accounts other than Personal and Real accounts
• Real accounts are accounts other than Personal and Nominal accounts
• Personal accounts are accounts other than Real and Nominal accounts

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

  Only one account head (say by name Assets a/c) is used to record all the information relating to the assets and debtors of the organisation.

  All the real accounts and the personal accounts representing debtors are to be assumed to be represented by the account head named Asset a/c. Asset a/c would take the place of Furniture a/c, Machinery a/c, Land a/c, Buildings a/c, Shyam's a/c (debtor), Bank a/c, Cash a/c etc.

• Liabilities a/c

  Only one account head (say by name Liabilities a/c) is used to record all the information relating to the liabilities of the organisation.

  Liabilities are generally made up of personal accounts representing owned capital and loaned capital. Liabilities a/c would take the place of Capital a/c, Ram's a/c (creditor) etc.

Note : Assets and Liabilities include only accounts of the type Real and Personal.

Incomes/Gains and Expenses/Losses

• Expenses/Losses a/c

  Only one account head (say by name Expenses/Losses a/c) is used to record all the information relating to the expenses and losses relating to the organisation.

  All the nominal accounts representing expenses and losses are to be assumed to be represented by the account head named Expenses/Losses a/c

• Incomes/Gains a/c

  Only one account head (say by name Incomes/Gains a/c) is used to record all the information relating to the incomes and gains relating to the organisation.

  All the nominal accounts representing incomes and gains are to be assumed to be represented by the account head named Incomes/Gains a/c

Minimum five Account Heads

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.

1. The business is proposed to be started.

   There are no elements affected by this transaction. It is not a transaction to be taken into account based on the "Money Measurement Concept".

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

   Since capital in the form of cash is being brought into the business, capital increases by 1,00,000 and cash increases by 1,00,000

   Elements effected by the transaction are

   Capital a/c
   ↓
   Person
   ↓
   Personal a/c

   Cash a/c
   ↓
   Tangible Aspect (Asset)
   ↓
   Real a/c

3. Bought Furniture for cash 25,000

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

   Elements effected by the transaction are

   Furniture a/c
   ↓
   Tangible Aspect (Asset)
   ↓
   Real a/c

   Cash a/c
   ↓
   Tangible Aspect (Asset)
   ↓
   Real a/c

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

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

   Elements effected by the transaction are

   Goods/Stock a/c
   ↓
   Tangible Aspect (Asset)
   ↓
   Real a/c

   Cash a/c
   ↓
   Tangible Aspect (Asset)
   ↓
   Real a/c

   Vendor/Seller name irrelevant in Cash Purchase

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

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

   Elements effected by the transaction are

   Goods/Stock a/c
   ↓
   Tangible Aspect (Asset)
   ↓
   Real a/c

   Mr. Shyam Rao a/c
   ↓
   Person
   ↓
   Personal a/c

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

   Since goods are sold by taking cash, the value of Goods decrease by 20,000 and the cash available with the business would increase by 20,000.

   Elements effected by the transaction are

   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

7. Sold Goods on credit to M/s Bharat & Co., for 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 indicated by an element identified by the name of the organisation which purchased the goods on credit i.e. M/s Bharat & Co.

   Elements effected by the transaction are

   Goods/Stock a/c
   ↓
   Tangible Aspect (Asset)
   ↓
   Real a/c

   M/s Bharat & Co. a/c
   ↓
   Person
   ↓
   Personal a/c

8. Paid Cash into Bank 60,000.

   Since cash is paid into bank, the available cash reduces by 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 amount of balance in the bank which is newly created increases from zero by 60,000.

   Elements effected by the transaction are

   Cash a/c
   ↓
   Tangible Aspect (Asset)
   ↓
   Real a/c

   Bank a/c
   ↓
   Organisation
   ↓
   Personal a/c

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

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

   Elements effected by the transaction are

   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, 8,000

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

    Elements effected by the transaction are

    Cash a/c
    ↓
    Tangible Aspect (Asset)
    ↓
    Real a/c

    Mr. Bharat & Co. a/c
    ↓
    Organisation
    ↓
    Personal a/c

Practice Problems - Types/Kinds of Accounts