Debits and credits are treated differently in the general ledger, depending on what kind of transaction has taken place.
Transactions are classified into three account types: personal, real and nominal. A strong understanding of the difference between these is vital for any accounts-related role.
Personal accounts are related to individuals or firms. There are three types of personal accounts.
Natural persons account
These accounts are for real life people who physically buy or sell products and services, in order to track the amounts receivable or payable for these purchases.
Juridical persons account
These accounts are for organisations that have legal rights and obligations similar to that of a natural person, such as entering contracts. Many corporations are classed as juridical persons.
Representative personal account
This is when an account represents an individual. It is split into four types:
Outstanding expense account: expenses due to services received from other individuals and firms. Another name for this type of account is a liability account, as in the balance sheet the amount will appear on the liability side.
Advance expense account: similar to the outstanding expense account, but services are paid for in advance of the service.
Outstanding Income Account: the amount that is receivable after services or products have been delivered.
Advance Income Account: for the purpose of paying before the services or goods are provided to individuals or firms.
Real accounts, otherwise known as general ledger accounts, are permanent accounts that refer to assets such as cash, accounts receivable, buildings, land, machinery, and motor vehicles. The reason they are permanent accounts is that the account does not close at the end of the accounting year, meaning that any balances are carried over to become the next balances of that accounting year.
Nominal Accounts are temporary accounts that report revenues, expenses, gains and losses. These accounts are closed at the end of each accounting year, and any balances contained within a nominal account are transferred over to a permanent (real) account. This process allows for a nominal account to start the next accounting year with a balance of zero.
Types of accounts are covered in more depth within the AAT qualification. Find out more about how to develop your knowledge of accounting principles by getting in touch below.