Book-Keeping and Accountancy · Ch 2 — Meaning and Fundamentals of Double Entry Book-Keeping

Classification of Accounts — Modern (American) Approach

The Modern Approach, developed in American accounting practice and now taught alongside the Traditional Approach in most Indian commerce syllabi, including MSBSHSE's, classifies every account into one of five categories instead of three, based directly on the elements of the Accounting Equation and the Trading and Profit and Loss Account.

Category	Meaning	Examples
Asset Account	Economic resources owned by the business	Cash A/c, Building A/c, Furniture A/c, Debtors A/c
Liability Account	Amounts owed by the business to outsiders	Creditors A/c, Bank Loan A/c, Bills Payable A/c
Capital Account	The owner's claim on the business	Capital A/c
Revenue/Income Account	Amounts earned by the business	Sales A/c, Commission Received A/c, Interest Received A/c
Expense Account	Costs incurred by the business	Rent A/c, Salary A/c, Purchases A/c

Modern Rules of Debit and Credit

Category	Debit	Credit
Asset	Increase in asset	Decrease in asset
Liability	Decrease in liability	Increase in liability
Capital	Decrease in capital	Increase in capital
Revenue/Income	Decrease in income	Increase in income
Expense	Increase in expense	Decrease in expense

Notice the pattern: for Assets and Expenses, an INCREASE is a debit; for Liabilities, Capital, and Revenue/Income, an INCREASE is a credit. This mirrors the Accounting Equation directly — Assets sit on one side of the equation, while Liabilities and Capital sit on the other; and since Expenses reduce Capital while Revenue/Income increases it, they naturally follow the same debit/credit direction as the side of the equation they affect.

How the Modern Approach relates to the Traditional Approach

Traditional category	Broadly corresponds to (Modern)
Real Accounts	Asset Accounts
Personal Accounts (Capital, Drawings)	Capital Account
Personal Accounts (Creditors, outsiders)	Liability Accounts

Definition 1Asset Account (Modern Approach)

An account for an economic resource owned by the business; debited on increase, credi …

Definition 2Liability Account (Modern Approach)

An account for amounts owed by the business to outsiders; credited on increase, debit …

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