Also referred to as ledger account and “T” account. An account is a record of financial transactions of a specific item (item such as purchases, sales, commission etc) and contains the detail of transactions. In accounting, accounts are used to collect and record financial information. Examples of accounts are payable or creditor accounts, receivable or debtor accounts, cash accounts, bank accounts etc.
Record of debtors and creditors is maintained in debtor accounts and creditor accounts. Sales of goods are recorded in sales account and so on
Real accounts are also known as balance sheet accounts and permanent accounts. Real accounts are those accounts that are not closed at the end of an accounting period (e.g. a year) and their balances are transferred to the next accounting period. The closing balances of real accounts become the opening balance in the next accounting period
Real accounts are also referred to as balance sheet accounts because real accounts are accounts of assets, liabilities and capital and their balances are shown in the balance sheet.
Examples of real accounts
Real accounts of assets
Cash account, bank account, machinery account, building account, account receivable accounts etc.
Real accounts of liabilities
A/C Payable or creditors account, notes or bills payable account, accrued interest account, accrued commission account, bank loan account, mortgage loan account, issued bonds account, unearned income account, accrued tax account etc.
Real accounts of capital
Capital account, drawings account, common stock account, retained earnings account etc.
Nominal accounts are also known as income statement accounts and temporary accounts. Nominal accounts are closed off at the end an accounting period (e.g. a year) and their balances are NOT transferred to the next accounting period rather that their closing balances are presented in the income statement
Nominal accounts are also referred to as income statement accounts because nominal accounts are accounts of incomes and expenses and their balances are disclosed in income statement.
Examples of nominal accounts
Nominal accounts of incomes
Sales account, commission income account, rent income account, discount received account etc.
Nominal account of expenses
Purchases account, rent account, employee wages or salaries accounts, factory lease and depreciation expenses accounts, heating and electricity expenses accounts, repair and renewal of machinery and plant accounts, freight and demurrage expenses accounts etc.
The main benefit of ledger account is: it helps summarize and group together different transactions related to the same item or person which is helpful in preparing financial statements because while preparing financial statement we need the total increase or decrease in an item or a person account during an accounting period. For example if you think of sales, while preparing income statement we would be interested in total amount of sales made during this accounting and this figure can be extracted from sales account
The other benefits are listed below:
By classifying different transactions into related accounts, it helps in the preparation of trial balance to check the arithmetic accuracy of our accounting record
Separate ledger helps avoid different types of errors and it’s easier to check the accuracy of accounting record when similar transactions have been compiled together into a single related account
Separate ledger account of an item that groups many transactions can be helpful in tracing the specific pattern of increase or decrease in that item and figuring out the reasons for the same which would be a messy task without ledger accounts
Purchase return account is also known as return outward account. Purchase return account is an account maintained to record the amount of purchases return during an accounting period.
The closing balance of purchase return account is shown in income statement under the head of “cost of goods sold” wherein it gets offset against the total balance of purchases during an accounting period
Purchases return is the amount of goods which we have returned back to supplier because we were not satisfied with the goods, there might have defects in goods or because of some other reasons
Purchase return account is maintained under period inventory system which is the most popular stock valuation system followed mostly by big businesses. Under perpetual inventory valuation system, businesses don’t keep purchase return account rather than they just credit stock account
Because businesses want to know the amount of total sales and purchases made in an accounting period as separate information from how much of these purchases and sales were actually returned. It is helpful to use return accounts for tracing specific class of customers that usually return goods. Furthermore, return accounts makes the preparation of financial statements easier, since we need separate detail of items or accounts for that purpose
Sales return account is also known as return inward account. Sales return account is an account maintained to record the amount of sales return during an accounting period.
The closing balance of sales return account is shown in income statement under the head of “sales or revenue” wherein it gets offset against the total balance of sales made during an accounting period
Sales return is the amount of goods which the customers have returned back to the business because they are not satisfied with goods, there might have defects in goods or because of some other reasons
Sales return account is maintained under period inventory system which is the most popular stock valuation system followed mostly by big businesses. Under perpetual inventory valuation system, businesses don’t keep sales return account rather that they just debit stock account
Purchases account is maintained to record the amount of goods purchased during an accounting period. Whenever business purchases goods for the purpose of reselling them, it is debited to purchases account. Therefore, at the end of the accounting period, it shows the total amount of purchases for that accounting period
There is a special meaning of purchases in accounting. Purchases are those goods or items that are purchased with the chief purpose of selling them in ordinary course of business. For example if a business deals in personal computers, the purchase of personal computers should be referred to as purchases
Purchases don’t contain items which are purchased without intention to resell them or item which are helpful in conducting business activities but not the part of ordinary course of business such as fixed assets
Sales account is maintained to record the amount of goods sold during an accounting period. Whenever business sells goods in which it primarily deals, it is credited to sales account. Therefore, at the end of accounting period, it shows the total amount of sales for that accounting period
There is a special meaning of sales in accounting. Sales are those goods in which a business primarily deals or sales of items which were purchased with the chief purpose of selling them in ordinary course of business. For example if a business deals in PC, the sales of PCs should be referred to as sales
Sales do not contain items which were purchased without intention to resell them or item which are helpful in conducting business activities but not the part of ordinary course of business such as fixed assets
Books of secondary entries are all those books of accounts that don’t record transactions in the firs place. As opposed to this, they record the transactions which have already been recorded by the books of original entries (like cash book, journal etc)
In other words, books of secondary entries use the already recorded data or they don’t record original financial information rather than they use the previously recorded transactions from books of original entries. For example accountants record transactions in journals and then they transfer these transactions to ledger accounts which are the books of secondary entries
Examples of books of secondary entries
Main ledger accounts such as debtor control account, creditor control account, building account, depreciation account, rent account, sales account, purchases account etc.
Subsidiary ledger accounts such as debtors accounts, creditors accounts, stock account and other ledger accounts to keep memorandum