Corporate Fin Mgt NDLM.PDF

4. Classification

4.1. There are 3 kinds of accounts: (i) Personal Account, (ii) Asset Account and

(iii) Nominal Account. A description is each of these is given below.

1. Personal Account: Personal Account concerns dealings with persons or firms.
   Separate Accounts are maintained for each person/firm. The principles for
   Debiting and crediting of personal accounts are:

? Debit when personal account receives the benefit

and

? Credit when personal account imparts benefit

Example 1:
Personal Account:

Mr. ‘X’ sold goods worth Rs.600 to Mr. ‘Y’ on credit basis.

This means that Mr. Y did not pay cash immediately. In other words, for the
moment i.e., on the same day, no cash transactions have taken place. It may therefore be
noted that in case of credit transactions, personal accounts are opened to indicate ‘to be
paid’ or ‘to be received’.

In the books of Mr. ‘X’ the personal account of ‘Y’ has to be debited. Since Y
received the benefit, it must show that ‘Y’ is yet to pay ‘X’.

In the books of Mr. ‘Y’, the personal account of Mr. ‘X’ has to be credited. Since
X has imparted the benefit, it must show that ‘Y’ is owes money to ‘X’.

2. Asset Account: Asset Account is an all encompassing account covering cash, goods,
   cash at bank, furniture, machines, buildings, plants, lands, vehicles, semi- finished goods,
   raw material, etc. The principles of ‘asset account’ are:

? Debit what comes in

and

? Credit what goes out

In the example given in the box above, the goods account is also affected by the
transaction. The goods account is an asset account.

Now, keeping in view the principle of debit what comes in, the books of Mr. ‘Y’ will
debit the ‘goods account’ since goods have come into Mr. Y's possession.

Similarly, keeping in view the principle of credit what goes out, the books of Mr. X will
credit the goods account since goods have gone out from Mr. X's possession.