The Rules for the Recording of Journal Entries
When the accountants from an accounting firm in Johor Bahru are recording journal entries in the books of accounts of their clients, there are some rules that they need to follow. The rules will change according to the nature of the accounts that involve in those business transactions. The most common way to classify the accounts is to divide them into the real accounts, nominal accounts and personal accounts.
The nominal accounts are the accounts that will only store the business transactions for one year. This means the accountants will transfer the balances in those accounts into the real accounts at the end of every accounting period (Also see Understanding Year-end Adjustments). Nominal accounts serve to collect information for the accounting transactions relating to the revenues, expenses, gains as well as losses. These are the items that will typically appear in the company’s income statement.
The accountants will record the journal entries related to the nominal accounts by debiting the losses and expenses incurred and crediting the gains and incomes earned. The accounts that are classified as the nominal account include profits, dividend, interest, depreciation and so on.
Another type of account is the real accounts. These are the accounts that will maintain the balances continuously. The real accounts include those that the accountants would aggregate into the company’s balance sheet (Also see Accounting – Key Elements of a Balance Sheet) and thus, the asset, liability, as well as equity accounts, fall under the category of real accounts.
When recording the transactions involving real accounts, the accountants would use debit entries to record anything that comes into the company, and he would use credit entries to record anything that goes out of the company (Also see How Do Accountants Record Transactions?). Some examples of accounts that fall under the category real accounts include the cash account, bank balance, plant and machinery and others.
On the other hand, personal accounts are the accounts that are relevant to an individual, an organisation or a business. The accountants will always record the transactions in the personal accounts by debiting the recipient and crediting the giver. As an instance, XYZ Corporation has sold some goods to Charlie. In this case, Charlie is a personal account, and XYZ Corporation will record this transaction by debiting Charlie’s account as he is the recipient.
Apart from the three accounts mentioned above, the accountants will need to deal with the asset and liability accounts occasionally. In the case of the asset accounts, the accountant will debit the asset account when there is an increase in the assets. If the asset has reduced, they will credit the asset account. As against, for liability accounts, the accountants will debit them when the liabilities of the company decrease and credit that account if there is an increase in the company’s liabilities