Nature of Accounts and Rules of Debit and Credit

Nature of Accounts and Rules of Debit and Credit:

Definition and Explanation:

The term “account (a/c)” is a record in summarized and classified form of all business transactions that take place between particular person or persons thing or things specified. The principle benefit from bookkeeping is that it enables a trader to know the aggregate effect of his trade and also to keep due control over business affairs. In order to achieve these transactions of like nature or with same person or to be classified and grouped. For example, during a month we purchase goods for six times from X. In order to know the total amount due to him we must put all these transactions under due head or group called – X’s Account, and add together. On the other hand, to know our total purchases of goods during this period we must also put all these purchases under another group called purchases Account. Similarly, we pay for salary, rent, postage, etc, on different dates to different persons. To know the total amount of expenditure made on each item, they must be classified in respective groups such as “salary, rent, postage”, etc. Such a group is called an account. It is a summary of transactions relating to a particular person or a specified thing. Account is the root of accounting.

Classification of Accounts:

To record a transaction in the books of accounts, the first thing to do is to ascertain which account is to be debited and which account is to be credited. In order to ascertain this correctly, a clear idea about the different classes of accounts is essential. Accounts may be divided into the following three classes

Real or Property
Nominal or Property

Personal Accounts:

Accounts relating to persons or firms are called personal accounts. Personal accounts can take the following forms:

  1. Natural Person’s Accounts: For example Rehman’s Account, Karim’s Account etc.
  2. Artificial Person’s and Body of Person’s Accounts: For example, Habib Bank a/c, Bengal Oil Mills Limited., a/c etc. or any institution’s account, or any club’s account.
  3. Representative Personal Account: When an account represents certain person or persons then it is called a representative personal account. In  books the names of the actual parties appear. But since they are of the same nature and many in number, the amounts standing against these accounts are added and put under one common title. For example, if a business is not able to pay salary for the last two months to the workers, then the workers will be treated as creditors of the business. The amount due to these employees will be added and put under one common title “salaries outstanding account” thus the salary outstanding is a personal account. Other examples of the personal accounts of this nature are: Unexpired insurance account; rent prepaid account; interest outstanding; interest received in advance account etc.

Real or Property Accounts:

(Accounts of properties or things) are those which keep records of properties or things owned by a trader e.g.; machinery account, land account, furniture account, building account, cash account, etc. These accounts have existence and they are tangible, therefore, called real account.

Nominal or proprietary Accounts:

(Accounts of gains and losses) are those that record expenses, gains and losses such as salary account, wages account, rent account, repair account, interest account, discount account, etc. These accounts have no existence except mere in name and are therefore, called nominal. They are also called proprietary being related to the proprietor of the business.


  1. Some impersonal accounts may be personal in meaning e.g., capital account, drawing account, loan account. These accounts are personal accounts of the proprietor of a business or of the partners thereof, who are creditors of the concern for the amount of their capital and debtors to the extent of their drawings.
  2. Some accounts may be both real and nominal e.g., stationery account. Stationary articles used during the year will be related to nominal but the unused stationary articles will be carried over to the next year. This will be treated as real and will be shown in the balance sheet.


Difficulties Encountered in Process Costing Procedures:

Learning objectives of this article:

What are the difficulties or Limitations in a process costing procedure?

Certain difficulties likely to be encountered in actual practice should be mentioned with regard to process cost accounting procedures:

The determination of production quantities and their stage of completion presents problem. Every computation is influenced by these figures. Since the data generally come to the cost department from operating personnel often working under circumstances that make a precise count difficult, a certain amount of double counts and unreliable estimates are bound to exist. Yet, the data submitted from the basis for the determination of inventory costs.

Materials cost computations frequently require careful analysis In the illustrations materials are generally considered to the the cost of first department. In certain industries, materials costs are not even entered on production reports. When materials prices are influenced by fluctuating market quotations, the materials cost may be recorded in a separate report designed to facilitate management decisions in relation to the materials market.

The discussion of lost units by shrinkage, spoilage, or evaporation indicates that the time when the loss occurs influences the final cost calculation. Different assumptions concerning the loss would result in departmental unit costs, which, in turn effect inventory costs, the cost of units transferred, and the completed unit cost. Another consideration involves the possibility of treating cost attributable to avoidable loss as an expense of the current period. Industries using process cost procedures are generally of the multiple product type. Joint processing cost must be allocated the the products resulting from the processes. Weighted unit averages or other bases are used to prorate the joint cost to the several products. If units manufactured are used as a basis for cost allocation, Additional clerical expenses are necessary if the labor hour or machine hour basis is used for charging overhead to work in process. Management must decide whether economy and low operational cost are compatible with increased information based on additional cost computations and procedures.

It should be noted that some companies use both process costing and job order costing procedures for various purposes in different departments. This is particularly true when a parallel or selective cost flow format is required. Each system or method employed by a company must be based on reliable production and performance data which, when combined with output, budget, or standard cost data, will provide the foundation for effective cost control and analysis.


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