ApproachesforRecordingDebitandCreditofan

Account
by:ASharma|category:RulesofDebitandCredit

Readthisarticletolearnaboutthetwoapproachesforrecordingdebitand
creditofanaccount,i.e.,(i)TraditionalApproachand(ii)ModernApproach.

1.TraditionalApproach:
Traditionalapproachofdebitingorcreditingtheaccountisbasedonclassification.Under
traditionalapproach,allledgeraccountscanbeclassifiedintopersonalandimpersonal
accounts.Beforediscussingtherulesfordebitandcreditforpersonalandimpersonal
accounts,itisnecessaryforustounderstandthemeaningoftheseaccountsunderthe
traditionalapproach.

I.PersonalAccounts:
Inthistypeofcategory,accountsofnaturalpersons,artificialpersonsandrepresentative
personsaregrouped.
(i)NaturalPersons:
Naturalpersonsmeanhumanbeings.Hence,inthistypeofcategory,accountsofhuman
beingsareinvolved.Forexample,RamsAccount,DebtorsAccount,CreditorsAccount,
ProprietorsCapitalAccount,ProprietorsDrawingsAccountetc.
(ii)ArtificialPersons:
Artificialpersonsarethosepersonswhoarenothumanbuttheycanworklikehumans.Inthe
eyesoflaw,theyarecompetenttoenterintoanagreementlikeanyhumanbeings.For
example,Mohan&Company,Firm,CorporateBody,Society,BankandanyGovernment
BodylikeMunicipalCorporationetc.

(iii)RepresentativePersons:
Inthistypeofcategory,accountsrepresentingpersons(naturalorartificial)orgroupof
personsareincluded.Actually,whennominalaccountsbecomeoutstanding,accruedor
prepaid,theyarecalledrepresentativepersons.Forexample,SalaryOutstandingAccount,
PrepaidRentAccountetc.

II.ImpersonalAccounts:
Inthistypeofcategory,allthoseaccountswhichdonotaffectpersonsaregrouped.
Theseaccountsarefurthercategorizedinto:
(i)RealAccountsand
(ii)NominalAccounts.
(a)RealAccounts:
Accountsoftangibleandintangiblepropertiesandpossessionareincludedinrealaccounts.
Therealaccountsmaybe
(a)TangibleRealAccountsand
(b)IntangibleRealAccounts.
(i)TangibleRealAccounts:
Tangiblerealaccountscompriseofthosethingswhichcanbeseen,touchedandmeasured.
Forexample,Furniture,Computer,Building,Stock,Cashetc.
(ii)IntangibleRealAccounts:
Intangiblerealaccountsconsistofthoseitemsthatcannotbeseen,touchedandmeasured
buthavemonetaryvaluessuchasTrademark,Copyright,PatentandGoodwill.
(b)NominalAccounts:
Accountswhichrelatetotheexpenses,losses,incomesandgainsofthebusinessconcernare
knownasnominalaccounts.Forexample,RentAccount,SalaryAccount,Commission
Accountetc.Theseaccountsarealsoknownastemporaryaccountsbecausedependingupon
theirnature(directorindirect),theseaccountsaretransferredtotheTradingorProfitand
LossAccountattheendofthefinancialyear.

RulesofDebitandCreditunderTraditionalApproach:
Undertraditionalapproach,accountscanbeclassifiedintopersonalandimpersonal
accounts.
Rulesfordebitandcreditfortheseaccountsareasunder:

I.PersonalAccounts:DebitTheReceiverAndCreditTheGiver.
Wheretheaccountsarerelatedtopersons,theruleisdebitthepersonwhoreceivesthe
benefitandcreditthepersonwhogivesthebenefit.

II.RealAccounts:DebitWhatComesInAndCreditWhatGoesOut.
Inthecaseofrealaccounts,theruleisdebitwhatcomesinandcreditwhatgoesout.

III.NominalAccounts:DebitAllLossesandExpenses&CreditAllIncomesand
gains.
Inthecaseofnominalaccounts,theruleisdebitalllossesandexpenses&creditallincome
andgains

2.ModernApproach(AccountingEquationApproach):
Modernapproachofdebitingorcreditingtheaccountisbasedonaccountingequation.
Hence,ModernApproachisalsoknownasAccountingEquationApproach.Weknowthat
accountingequationremainsbalancedallthetime.
Wehavealsoanalyzedthatinanyaccountingequation,therearethreemainelementsviz.
Assets,LiabilitiesandOwnersEquities.Theprofitorlossisthenetresultofrevenuesand
expensesofthebusinessduringtheyearandwillchangetheownersequity(Capital).
Therefore,thebasicaccountingequationcanbeexpandedasunder:
Assets=Liabilities+Capital+RevenuesExpenses
Undermodernapproach,accountscanbeclassifiedinfivecategoriesviz:
(i)AssetsAccounts
(ii)LiabilitiesAccounts
(iii)CapitalAccounts
(iv)RevenueAccountsand

(v)ExpensesAccounts.

I.AssetAccounts:
Inthistypeofcategory,assetsaregrouped.Forexample,LandandBuildingsAccount,
FurnitureAccount,BankAccount,CashAccount,TradeMarksAccount,GoodwillAccount
etc.

II.LiabilitiesAccounts:
Inthistypeofcategory,accountsrelatedtothosefinancialobligationsofanenterpriseare
groupedwhicharerelatedtooutsiders.Forexample,CreditorsAccount,Salarys
OutstandingAccountetc.

III.CapitalAccounts:
Inthistypeofcategory,accountsrelatedtothosefinancialobligationsofanenterpriseare
groupedwhicharerelatedtotheowner(s).Forexample,CapitalAccountandDrawings
Account.

IV.RevenueAccount:
Inthistypeofcategory,accountsrelatedtosellingofgoods,renderingservicesandother
yieldsoftheenterprisearegrouped.Forexample,SalesAccount,RentReceivedAccount,
InterestReceivedetc.

V.ExpensesAccount:
Inthistypeofcategory,accountsrelatedtopurchaseofgoodsorservicesandtheamount
incurred/lostintheprocessofearningrevenuearegrouped.Forexample,PurchaseAccount,
DiscountAllowedAccount,SalariesAccount,RentAccountetc.

RulesofDebitandCreditunderModernApproach:
Nowweshallmovetodiscusstherulesfordebitandcreditforthemainitemsofaccounting
equationssuchasAssets,Liabilities,Capital,RevenuesandExpenses.

I.Assets:DebittheIncreaseandCredittheDecrease:

Whenthereisanincreaseintheamountofanasset,theassetshouldbedebitedandwhen
thereisadecreaseintheamountofanasset,itshouldbecredited.

II.Liabilities:CredittheIncreaseandDebittheDecrease:
Whenthereisanincreaseintheamountofaliability,theliabilityshouldbecreditedand
whenthereisadecreaseintheamountofaliability,itshouldbedebited.

III.Capital:CredittheIncreaseandDebittheDecrease:
Whenthereisanincreaseintheamountofcapital,thecapitalaccountistobecreditedand
whenthereisadecreaseintheamountofcapital,itshouldbedebited.

IV.Revenues:CredittheIncreaseandDebittheDecrease:
Whenthereisanincreaseintheamountofrevenues,therevenueaccountistobecredited
andwhenthereisadecreaseintheamountofrevenues,itshouldbedebited.

V.Expenses:DebittheIncreaseandCredittheDecrease:
Whenthereisanincreaseintheamountofanexpense,thentheexpenseshouldbedebited
andwhenthereisadecreaseintheamountofanexpense,itshouldbecredited.