Account Questions and Answers [With PDF]
Before you can write a journal entry or post to a ledger, you must know which account each part of a transaction belongs to. This chapter explains what an account is, how accounts are classified, and which side to debit or credit. Here are 25 important questions with simple answers and examples.
This is Chapter 3 of our Accounting course. If you are new, read Introduction to Accounting and Transaction first.
Meaning and Format of an Account
Q1. What is an account?
An account is a classified and summarized record of all the transactions relating to one person, asset, liability, expense or income. Every account has a title and shows its increases and decreases in two columns, debit and credit, so its balance can be found at any time.
Q2. What are some examples of accounts?
Cash A/c, Bank A/c, Furniture A/c, Sales A/c, Purchases A/c, Salary A/c, Capital A/c, Drawings A/c, Debtors A/c, Creditors A/c, and an individual’s account such as Paul A/c.
Q3. What are the main features of an account?
- It has a title that tells what the account is about.
- It has a debit side and a credit side.
- Entries are made date-wise.
- It has a reference column (folio) linking it to the journal.
- The balance is worked out at regular intervals.
- An account is closed for a period by ruling it off.
Q4. What is an account format?
An account format is the layout used to record transactions of the same kind under one heading. Two formats are common: the T format and the running (moving) balance format.
Q5. What are the characteristics of the T format?
- The account title is written at the top.
- The page is divided into two sides: debit (left) and credit (right).
- Each side has columns for date, particulars, journal folio (J.F.) and amount, so there are eight columns in total.
- The balance is found by taking the difference between the two sides after a period.
Q6. What are the characteristics of the running (moving) balance format?
- It has columns for date, particulars and journal folio.
- It has three amount columns next to each other: debit, credit and balance.
- The balance is updated after every transaction, so you always see the latest figure.
- Banks and computer systems usually use this format.
Q7. What is the difference between the T format and the running balance format?
| Point | T format | Running balance format |
|---|---|---|
| Layout | Debit and credit sides separated | Debit, credit and balance columns side by side |
| Balance | Found at the end of a period | Shown after every entry |
| Best for | Learning and manual ledgers | Banks and computerized books |
Classification of Accounts
Q8. How are accounts classified?
| Approach | Classes of accounts |
|---|---|
| Traditional approach | Personal, Real and Nominal accounts |
| Modern approach (accounting equation) | Assets, Liabilities, Owner’s equity, Income and Expenses |
Q9. What is the objective of classifying accounts?
- To find correct financial results and the financial position.
- To make it easy to decide which account to debit and which to credit.
- To compare results with other periods.
- To control costs.
- To apply the double entry system properly.
Q10. What are the benefits of classifying accounts?
- It becomes simple to decide the debit and credit sides of a transaction.
- The profit or loss (income and expenses) can be found easily.
- The totals of assets, liabilities, incomes and expenses are easy to identify.
Traditional Approach: Personal, Real and Nominal
Q11. What is a personal account?
A personal account relates to a person, firm, company or institution with which the business deals. There are three kinds:
- Natural persons: Paul A/c, Harry A/c.
- Artificial persons: ABC & Co. A/c, Citi Bank A/c.
- Representative persons: Outstanding Salary A/c, Prepaid Rent A/c.
Q12. What is a debtor account?
A debtor is a personal account of a person who owes money to the business. Example: goods worth 5,000 are sold to Harry on credit, so Harry A/c is a debtor account.
Q13. What is a creditor account?
A creditor is a personal account of a person to whom the business owes money. Example: goods worth 4,000 are bought from ABC & Co. on credit, so ABC & Co. A/c is a creditor account.
Q14. What is an impersonal account?
An impersonal account does not relate to any person. It relates to property, income or expenses. Impersonal accounts are of two kinds: real accounts and nominal accounts.
Q15. What is a real (property) account?
A real account relates to things the business owns, tangible or intangible. Examples: Cash A/c, Land A/c, Building A/c, Machinery A/c, Furniture A/c, Goodwill A/c.
Q16. What is a nominal account?
A nominal account relates to expenses, losses, incomes and gains. Examples: Salary A/c, Rent A/c, Purchases A/c, Sales A/c, Commission Received A/c, Interest Paid A/c.
Q17. What are the golden rules of debit and credit in the traditional approach?
| Type of account | Debit | Credit |
|---|---|---|
| Personal | The receiver | The giver |
| Real | What comes in | What goes out |
| Nominal | Expenses and losses | Incomes and gains |
Modern Approach: Accounting Equation
Q18. What is an owner’s equity account?
It shows the owner’s claim on the assets of the business. Examples: Capital A/c, General Reserve A/c, Retained (Undistributed) Profit A/c. Drawings A/c reduces equity.
Q19. What is an asset account?
An asset account records resources owned by the business and expected to give future benefit. Examples: Cash A/c, Bank A/c, Stock A/c, Furniture A/c, Machinery A/c, Debtors A/c.
Q20. What is a liability account?
A liability account records amounts the business owes to outsiders. Examples: Creditors A/c, Bills Payable A/c, Bank Loan A/c, Outstanding Expenses A/c.
Q21. What is an income (revenue) account?
An income account records the amounts the business earns from its activities. It increases the owner’s equity. Examples: Sales A/c, Service Fee A/c, Commission Received A/c, Interest Received A/c.
Q22. What is an expense account?
An expense account records the costs of running the business and earning income. It reduces the owner’s equity. Examples: Purchases A/c, Salary A/c, Rent A/c, Depreciation A/c, Transport A/c.
Q23. What are the debit and credit rules in the modern approach?
| Account | Increase | Decrease |
|---|---|---|
| Assets | Debit | Credit |
| Liabilities | Credit | Debit |
| Owner’s equity (Capital) | Credit | Debit |
| Income | Credit | Debit |
| Expenses (and Drawings) | Debit | Credit |
Q24. What are some examples of income accounts?
- Sales Revenue
- Service Revenue
- Commission Received
- Discount Received
- Rent Received
- Interest and Dividend Received
- Bad Debts Recovered
Q25. What are some examples of expense accounts?
- Purchases
- Salaries and Wages
- Rent Paid
- Discount Allowed
- Packing and Marketing Expenses
- Customs Duty
- Insurance Premium
- Depreciation
Quick Revision Points
- Traditional classes: Personal, Real, Nominal. Modern classes: Assets, Liabilities, Equity, Income, Expenses.
- Personal: debit the receiver, credit the giver.
- Real: debit what comes in, credit what goes out.
- Nominal: debit expenses and losses, credit incomes and gains.
- Assets and expenses increase on the debit side. Liabilities, equity and income increase on the credit side.
Check what you learned with the chapter quiz below, then move on to Double Entry System.
