Account, Meaning, Kinds of accounts, Corresponding rules for Debit and Credit

An account in accounting refers to a record that tracks the financial transactions related to a specific asset, liability, equity, income, or expense. It is used to organize and summarize financial data for a business or individual. Accounts are classified into five main categories: assets, liabilities, equity, revenues, and expenses. Each account has a debit and credit side, and changes in these accounts are recorded through journal entries. Accounts provide essential information for preparing financial statements such as the balance sheet and income statement, helping businesses analyze their financial performance and position.

In accounting, there are three main kinds of accounts, each with corresponding rules for debit and credit:

1. Real Accounts (Assets)

These accounts represent assets owned by the business.

• Examples: Cash, Buildings, Machinery, Inventory.
• Rule:
  • Debit: When assets increase.
  • Credit: When assets decrease.

2. Personal Accounts (Persons or Entities)

These accounts represent individuals, firms, or other legal entities with whom a business has dealings.

• Examples: Accounts of customers, creditors, bank accounts.
• Rule:
  • Debit: When the business receives value (receiving from someone).
  • Credit: When the business gives value (giving to someone).

3. Nominal Accounts (Expenses, Gains, and Losses)

These accounts represent expenses, revenues, gains, and losses.

• Examples: Rent, Salaries, Sales, Interest.
• Rule:
  • Debit: When expenses or losses increase.
  • Credit: When income or gains increase.