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Basic Accounting Procedures

Traditional Approach

Financial accounts can be classified into two types of approaches. Firstly, according to the Traditional approach or the British approach. The other way is the Modern approach or the American approach. The Key concepts under the Traditional approach are personal and impersonal accounts which we will discuss further in here.

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Traditional Approach of Financial Accounting

Traditional approach classifies the accounts while Modern approach uses the Accounting equation for accounting. Further, under the Traditional approach, all the ledger accounts are classified as “Personal” and “Impersonal accounts”. The rules of debit and credit under the Traditional approach are golden rules. Let us now understand them and how the accounts are classified.

Learn Modern Approach of Classification here.

Traditional Approach

Classification of Accounts:

  1. Personal accounts
  2. Impersonal accounts

Personal Accounts

These are the accounts of human beings, natural persons and artificial persons. Hence, Personal accounts are further classified as:

  1. Natural persons
  2. Artificial persons and
  3. Representative persons

Let us try and understand in detail.

1] Natural Persons

Natural persons are human beings. Here, we include accounts belonging to humans. Thus, Debtor’s A/c., Creditor’s A/c., Proprietor’s A/c., Proprietor’s Capital A/c., Proprietor’s Drawings A/c. etc. fall under this category.

2] Artificial Persons

These are those persons who are not human beings but can act and work like humans. They possess a separate identity in the eyes of law. So, they can enter into agreements. They qualify to be penalized too.

These, therefore, include Hindu undivided families, partnership firms, co-operative societies, an association of persons, companies, municipal corporations, hospitals, banks, government bodies, etc.

3] Representative Persons

As the name suggests, these accounts represent the accounts of the persons. These persons may be natural or artificial. Most importantly, when the nominal accounts i.e. those of expenses and incomes become outstanding, pre-paid, accrued or unearned, they fall under this category. Hence, Wages Outstanding A/c, Pre-paid Rent A/c, Accrued Interest A/c, Unearned Commission A/c, etc. fall under this category.

Impersonal Accounts

Impersonal Accounts are the accounts other than the Personal Accounts. Hence, these are further classified as:

  1. Real accounts
  2. Nominal accounts

1. Real Accounts

These accounts are the accounts of all the assets and liabilities of the business. Therefore, these accounts are not closed at the end of the accounting year. Thus, they continue to appear in the Balance Sheet. The balances of these accounts are carried forward to the next accounting year. So, these are permanent accounts and have the following categories:

(a) Tangible Real Account: 

It comprises of those assets, properties or possessions that one can touch, see and measure. For example, Building A/c, Furniture A/c, Cash A/c, etc.

(b) Intangible Real Account: 

It comprises of those assets or possessions that one cannot touch, see or measure. But these possess a monetary value. Thus, they can be bought and sold also. For example, Goodwill, Patents, Copyrights, Trademark, etc.

2. Nominal Accounts

Nominal accounts are the accounts related to the expenses, losses, incomes, and gains. These accounts are temporary accounts. Therefore, the balances of these are transferred to Trading and Profit and Loss A/c at the end of the accounting year. Hence, these accounts have no balance to carry forward next year.

Learn the Types of Accounts here.

Rules for Debit and Credit under the Traditional Approach

Personal Account Debit the Receiver; Credit the Giver
Real Account Debit what comes in; Credit what goes out
Nominal Account Debit all expenses/losses; Credit all income/gains

Solved Example For You

Q. Analyze the following transactions based on the traditional approach of accounting. State which accounts are to be debited and credited.

  1. Chitra commenced business with cash ₹ 1, 00,000.
  2. Purchased furniture for cash ₹ 10,000
  3. Purchased goods from Ram on credit ₹ 50,000
  4. Sold goods for cash ₹ 20000
  5. Paid salary to Jatin ₹ 15,000
  6. Paid to Ram ₹ 25000
  7. Salary to be paid to Rahul is outstanding ₹ 5000
  8. Commission earned but not received ₹ 2000
Transaction Accounts involved Nature of Accounts involved     How accounts are affected Whether Debited or Credited
1. Cash A/c Real A/c Cash is coming in Debit
Capital A/c Personal A/c Chitra is the giver Credit
2. Furniture A/c Real A/c Furniture is coming in Debit
Cash A/c Real A/c Cash is going out Credit
3. Purchases A/c Real A/c Goods are coming in Debit
Ram’s A/c Personal A/c Ram is the giver Credit
4. Cash A/c Real A/c Cash is coming in Debit
Sales A/c Real A/c Goods are going out Credit
5. Salary A/c Nominal A/c Salary is an expense Debit
Cash A/c Real A/c Cash is going out Credit
6. Ram’s A/c Personal A/c Ram is the receiver Debit
Cash A/c  Real A/c Cash is going out Credit
7. Salary A/c Nominal A/c Salary is an expense Debit
Salary Outstanding A/c Representative Personal A/c Salary is payable to Rahul and therefore he is our creditor. Credit
8. Accrued Commission A/c Representative Personal A/c Commission is receivable from the client, therefore the client is our debtor Debit
Commission A/c Nominal A/c The commission is an income Credit


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