The debit and credit are the terms that denote whether the entry is to be made on the left hand side of the T account or the right hand side of the account where the left entry indicate the debit in the account while the left side indicate credit in the account. So the rules of debit and credit are framed to state the criteria which explain when the account is debited or credited. Under the traditional approach of accounting, the accounts are classified into Personal accounts and impersonal accounts and rules of debit and credit are defined accordingly.
In the double entry system of accounting, the rules are framed related to debit & credit for recording of transactions. The transactions in the books of journal are recorded on the basis of these rules of accounting. Further, there are two approaches which define the criteria of recording the transactions. The first approach is traditional approach and the second one is the modern approach. This article will focus on traditional approach of accounting.
Under the traditional approach, the accounts are classified into two categories:
A. Personal accounts:
Personal accounts are the accounts that relates to person, trade payables or trade receivables. For example the account of supplier (Creditor) or the account of Customer (Debtor). Also the capital account of the owner of the business is the personal account. Again personal account is further bifurcated into the below 3 categories:
- Artificial Personal Account: As we know that the owner and the business entity owned by that owner is distinct in the eyes of law and such business entity is artificial person in the eyes of law. Therefore the business entity is the artificial personal account. For example proprietorship firms, companies, co-operative societies etc. Even the bank account is artificial personal account.
- Natural personal accounts: This kind of account is the account of a natural person like Mr. John, Miss Zeya, Debtors A/c, Creditors A/c ,Capital A/c etc.
- Representative personal accounts: These accounts are not the accounts in any people or organization’s name but are still represented as personal accounts such as prepaid account, Accrued Interest account, drawings account etc.
B. Impersonal accounts:
Those accounts that are not personal are known as the impersonal accounts such as plant & machinery A/c, rent A/c, salary A/c, cash account etc. Now the impersonal account are further sub-divided into following:
- Real Accounts: Real accounts are those that are the accounts of assets and properties of the business whether tangible or intangible. For example cash in hand, fixed assets accounts such as Furniture, building and other assets etc.
- Nominal Accounts: Nominal Accounts are the accounts that relates to gains, revenues, expenses and losses such as purchases account, commission account, salary account, rent account, sales account, interest income account, discount received account etc. In other words, the nominal account basically relates to all the incomes & expenses that appears in the profit & loss A/c and then are transferred to capital account. Therefore, they all are temporary accounts.
Rules of debit credit in traditional approach
All the above accounts are debited and credited as per the below rule:
- In case of personal account: Debit the receiver, credit the giver
- In case of real account: Debit what comes in, credit what goes out
- In case of nominal account: Debit all expenses & losses and credit all gains & Incomes.
Therefore, In traditonal classification of accounting the accounts are classified into two categories namely personal accounts and impersonal accounts where the impersonal accounts are further classified as real accounts and nominal accounts and the rules of debit and credit are different in case of every kind of account.