American or Modern Rules of Accounting
There are a couple of ways to approach the art of accounting, traditional and modern. Classification of accounts under both traditional and modern rules of accounting is done very differently.
The UK or traditional style of accounting classifies all accounts of a business into 3 main types i.e. Real, Personal & Nominal. On the other hand, American or modern rules of accounting classify all accounts into 6 different types i.e. Asset, Liability, Capital, Revenue, Expense & Drawings.
Traditional or Golden rules of accounting are applied with real, personal, and nominal accounts, however, American or modern rules of accounting are applied with the modern classification of accounts.
Classification of Accounts and Modern Rules
The first step is to identify the type of account from either of the 6 categories shown in the below table. Once the account is determined correctly, apply modern rules of accounting to prepare a perfect journal entry.
| Type of Accounts | Debit | Credit |
| Asset | Increase | Decrease |
| Liability | Decrease | Increase |
| Capital | Decrease | Increase |
| Revenue | Decrease | Increase |
| Expense | Increase | Decrease |
| Drawings | Increase | Decrease |
Tip – Memorize the word (CRADLE) which means “small bed for a baby” in the English language.
C – Capital, R – Revenue, A – Assets, D – Drawings, L – Liability, E – Expense
Another way to look at modern rules of accounting is,
Example Journal Entries
- Example I – Purchased furniture for 20,000 in cash, prepare the journal entry
| Accounts Involved | Amount | Rule Applied |
| Furniture A/C | 20,000 | Asset – Dr. the increase |
| To Cash A/C | 20,000 | Asset – Cr. the decrease |
- Example II – Received 1,00,000 in the bank as a loan, prepare the journal entry
| Accounts Involved | Amount | Rule Applied |
| Bank A/C | 1,00,000 | Asset – Dr. the increase |
| To Loan A/C | 1,00,000 | Liability – Cr. the increase |
- Example II – Received 5,00,000 via a cheque from Mr. Unreal as a trade receivable, prepare the journal entry
| Accounts Involved | Amount | Rule Applied |
| Bank A/C | 5,00,000 | Asset – Dr. the increase |
| To Mr. Unreal A/C | 5,00,000 | Revenue – Cr. the increase |
Short Quiz for Self-Evaluation
>Read Step by Step Accounting Process