Personal Accounts

Accounts recording transactions relating to individuals or firms or company are known as

personal accounts. Personal accounts may further be classified as :

(1) Natural person's personal accounts: The accounts recording transactions relating to
individual human beings e.g., Anand's A/c, Remesh's A/c, Pankaj's A/c are classified as
natural person's personal accounts.

(2) Artificial person's personal account: The accounts recording transactions relating to
limited companies. bank, firm, institution, club. etc. e.g. Delhi Cloth Mill; Hans Raj College;
Gymkhana Club are classified as artificial persons' personal accounts.

(3) Representative personal accounts: The accounts recording transactions relating to the
expenses and incomes are classified as nominal accounts. But in certain cases due to the
matching concept of accounting the amount, on a particular date, is payable to the
individuals or recoverable from individuals.

Such amount (a) relates to the particular head of expenditure or income and (b) represents
persons to whom itis payable or from whom it is recoverable. Such accounts are classified
as representative personal accounts e.g. "Wages Outstanding Account", Pre-paid Insurance
Account. etc.

Real Accounts

The accounts recording transactions relating to tangible things (which can be touched,
purchased and sold) such as goods, cash, building. machinery etc., are classified as tangible
real accounts.

Whereas the accounts recording transactions relating to. intangible things (which do not
have physical shape) such as goodwill, patents and copy rights. trade marks etc., are
classified as intangible real accounts.

Nominal Accounts

The accounts recording transactions relating to the losses, gains. expenses and incomes
e.g., Rent, salaries, wages, commission, interest, bad debts etc. are classified as nominal
accounts. As already discussed, wherever a nominal account represents the amount payable
to or receivable from certain persons it is known as representative personal account.

Rules of Debit and Credit (classification based)

1. Personal Accounts: Debit the receiver (purchaser), Credit the giver (supplier)

2. Real Accounts: Debit what comes in, Credit what goes out

3. Nominal Accounts: Debit expenses and losses, Credit incomes and gains.
Hints for Journalizing

The following discussion will help in diagnosing the transaction with a view to find out which
accounts are relevant for passing the journal entry.

1. Treatment of cash/credit transaction.

Read carefully the following transactions:

(i) Purchased goods for Rs. 1,200 cash. .

(ii) Purchased goods for Rs. 1,200.
(iii) Purchased goods for Rs. 1,200 from Arun.
(iv) Purchased goods for Rs. 1,200 from Arun on cash.

Transaction (i) and (iv) are clear as it has been specifically stated that purchases have been
made on cash. Thus the entry is:

Purchases account Dr. 1,200 To Cash account Cr 1,200

Transaction (ii) and (iii) are not specific as to whether the purchases are for cash or on
credit. However transaction (ii) does not mention any name of the supplier; therefore it
implies that the purchases are for cash. Similarly transaction (iii) mentions the name of the
supplier but is silent regarding cash-it implies that purchases are on credit: Thus the entry
for transaction (iii) is

Purchases account Dr. 1,200 To Arun Cr 1200.

2. Treatment of payment on personal/expenses account.

When payment is made to a person against amount due to him as per his ledger account-
the personal account of the creditor should be debited. However if the payment is being
made to a person representing business expenditure then the particular expenditure
(nominal) account should be debited.

3. Treatment of receipt on personal/ income account.

When amount is received from a person against amount recoverable from him as per ledger
account-the personal account of the debtor should be credited. However if the amount
received represents business income, then the particular income (nominal) account should
be credited.

4. Treatment of trade discount.

In many cases the seller allows to the buyer deduction off the list price. Such deduction is
known as 'trade discount'. Trade discount as such is not recorded in the books. The
transaction is recorded with only the net amount i.e. (list price -trade discount).

5. Treatment- of cash discount (full settlement).

In some cases creditor may allow some concession to his debtor to prompt him to make the
payment within the period of credit allowed. Such concession is known as 'cash discount'. It
is allowed by the person receiving the payment and represents, expenditure. It is availed by
the person making the payment and represents income.

6. Treatment of Bad debts (debtor becoming insolvent).

An amount due from a debtor may become irrecoverable either partially or wholly. Reason
may be that he has been declared insolvent or any other. Such irrecoverable amount
represents loss to the business and is debited to Bad debts amount.

7. Treatment of Bad debts recovered

It is evident from the above entry that whenever irrecoverable amount is written off the
personal account is credited. If after some time any payment is received against a debt
previously written of then it represents income and as such should be credited to an account
styled as 'Bad debts recovered account'. Personal account must not be credited.

8. Treatment of personal expenses of the owner

It is quite common for the proprietor to withdraw cash or goods from the business for
personal or domestic use. Sometimes premium on the life policy of the owner may also be
paid by the business. Similarly income tax payable by the proprietor may be paid by
business. All this represents owner's personal expenses and are debited to his personal
account viz. Drawings account.

9. Treatment of payment/ receipt on behalf of customer or supplier.

In some cases business might pay expenses on behalf of its customers. Such payments do
not constitute the expenditure of business. Hence it should be debited to the personal
account of the concerned customer.

10. Treatment or exchange or new asset with old one.

Sometimes business may exchange its old asset with new one-only the difference in value is
paid in cash. In such cases asset account needs debit only with the actual amount paid.

11. Treatment of goods given as charity/ advertisement.

Business might distribute goods as 'free samples' to advertise its products. In some cases it
may also distribute goods as charity to boost its image. Both 'advertisement' and 'charity'
are expenses of the business, hence should be debited and purchases account should be
credited.

12. Treatment of goods lost in accident/ fire.

In certain case a business might suffer loss of goods due to some accident or fire etc.,
destroyed or damaged goods might have been insured also. In such cases total value of
goods lost or destroyed is credited to purchases account and the (i) insurance claim
admitted is debited to Insurance Company (ii) balance is debited to loss by accident/ fire
account.
13. Treatment of depreciation charged on fixed assets.

Fixed assets are those properties/ possessions of the business which are used for carrying
on of business viz. plant, machinery, building etc. Depreciation is the permanent decrease in
the value of an asset due to wear and tear, passage of time and obsolescence. Depreciation
is treated as a business expenditure. Depreciation account is debited and the respective
asset account is credited.

14. Treatment of payment/ receipt of representative personal accounts.

At the close of the previous accounting year a business might have incurred expenditure
which remained unpaid. It is known as 'Outstanding expenditure'. It is a representative
personal account. When actual payment is made in current accounting period the concerned
account is debited and cash account is credited.

Advantages of Journal

(1) Transactions are recorded in the chronological order, thus reducing the chances of
omitting any transaction.

(2) Transactions, invariably, are accompanied by narration. Thus, the entry is supplemented
with basic information regarding the transactions.

(3) Debit and credit amounts are written side by side. It minimizes the chances of entering
wrong amount.

Restricted use of Journal

Originally the system of recording the financial transactions developed consisted of (1)
writing each transaction, with narration, in the book of original entry,
i.e.. Journal and then (2) posting therefrom to the respective accounts in the principal book,
i.e., ledger. As the number of transactions' grew the system was modified and the
transactions of similar
nature say purchases, sales, cash etc. were recorded in sub-journal instead of journal for
the following
reasons:

(i) If too many transactions are recorded in journal it will be unwieldy.

(ii) In every business cash balance is required to be ascertained at frequent intervals, say,
everyday: therefore it was found convenient to use a separate book for recording cash
transactions.

(iii) By recording transactions of similar nature. in one sub journal, say, purchases of goods
in purchases journal saves time and efforts in recording and posting.

Because of the reasons listed above, nowadays, journal is used to record only such
transactions which are infrequent. Now a days computerized accounting has made the entry
of journal very easy and accurate.
Double Entry System

In the 15th century a Franciscan Monk, Lucas Pacioli, described a method of arranging
accounts in such a way that the dual aspect (present in every account transaction) would be
expressed by a debit amount and an equal and offsetting credit amount.

Double Entry system is the system under which each transaction is regarded to have two
fold aspects and both the aspects are recorded to obtain complete record of dealings.
Double Entry system of book keeping adheres to the rule. that for each transactions the
debit amount (s) must equal the credit amount(s). That is why this system is called Double
Entry.

Advantages of Double Entry System

(i) It enables to keep a complete record of business transactions.

(ii) It provides a check on the arithmetical accuracy of books of accounts based on equality
of debit and credit.

(iii) It gives the results of business activities either profit or loss during the accounting
period.

(iv) It tells the financial position of the business at a point of time. Total resources of the
business, claims of the outsiders, amount due by outsiders etc. are revealed by a statement
known as Balance Sheet.

(v) It makes possible comparison of the current year with those of previous years helping
the owner to manage his business on better lines.

(vi) It reduces the chances of errors creeping in the accounting records because of its
equality principle. .

(vii) It helps to ascertain the details regarding any account easily and accurately. Other
systems of book-keeping. In addition to the double entry system, there is also single entry
system.

The single-entry system is "a system of book-keeping in which as a rule only records of
cash and of personal account are maintained; it is always incomplete double entry varying
with circumstances. Such system may be economical but it is incomplete, unscientific and
full of defects.

Compound Journal Entries

If in a journal entry only one account is to be debited and only one account is to be credited
then such an entry is 'Simple Journal Entry'. However, in some cases the entry may require
more than one debit or credit or both. Such entries are known as compound entries.
Compound entries should be created where

(i) Transaction occur on the same day

(ii) One aspect of these transactions is common; and

(iii) Accounts involved are more than two In fact compound entry is the combination of two
or more simple journal entries.
Three Column Cash Book:

Learning Objectives:

1. Define and explain a three column cash book/treble column cash book.
2. Prepare a three column cash book.
3. What is the difference between a single column cash book, a double column cash
book and a three column cash book?

Definition and Explanation:

A three column cash book or treble column cash book is one in which there are three
columns on each side - debit and credit side. One is used to record cash transactions, the
second is used to record bank transactions and third is used to record discount received and
paid.

When a trader keeps a bank account it becomes necessary to record the amounts deposited
into bank and withdrawals from it. For this purpose one additional column is added on each
side of the cash book. One of the main advantages of a three column cash book is that it is
very helpful to businessmen, since it reveals the cash and bank deposits at a glance

Writing a Three column Cash Book:

Opening Balance:

Put the opening balance (if any) on cash in hand and cash at bank on the debit side in the
cash book and bank columns. If the opening balance is credit balance (overdraft) then it will
be put in the credit side of the cash book in the bank column.

Cheque/Check or Cash Received:

If a cheque is received from any person and is depoisted into the bank on the same date it
will appear on the debit side of the cash book as "To a Person". The amount will be shown in
the bank column. If the cheque received is not deposited into the bank on the same date
then the amount will appear in the cash column. Cash received will be recorded in the usual
manner in the cash column.

Payment By Cheque/Check or Cash:

When we make payment by cheque, this will appear on the credit side "By a person" and
the amount in the bank column. If the payment is made in cash it will be recorded in usual
manner in the cash column.

Contra Entries:

If an amount is entered on the debit side of the cash book, and the exact amount is again
entered on the credit side of the same account, it is called "contra entry". Similarly an
amount entered on the credit side of an account also may have a contra entry on the debit
side of the same account.

Contra entries are passed when:

1. Cash is deposited into bank by office: It is payment from cash and receipt in bank.
You may also be interested in other articles from "subdivision of journal" chapter:

1. Definition and Explanation of Cash Book

2. Single Column Cash Book
3. Two Column Cash Book/Double Column Cash Book
4. Three Column Cash Book
5. Bank Reconciliation Statement
6. Petty Cash Book
7. Purchases Day Book
8. Purchases Returns Book
9. Sales Day Book
10. Sales Returns Book
11. Bills Receivable Book
12. Bills Payable Book

13. Journal Proper

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