EPFO EO/AO 2023 General Ability Test · Question 45 of 120

Correct — B, (b) Representative personal account. The booklet sets the phrase in quotation marks, and that is a hint worth taking: the question is about the account called 'Outstanding rent', not about rent. Under the traditional classification, accounts are personal, real or nominal, and personal accounts come in three varieties. Natural personal accounts belong to human beings — Ram's account, the landlord's account. Artificial personal accounts belong to legal persons that the law treats as capable of owing and being owed — a company, a bank, a club, a firm. Representative personal accounts belong to nobody by name, but stand in the books FOR a person or a group of persons. Outstanding rent is the classic example: the balance is money the business owes to its landlord for a period already enjoyed, and the account exists because at the closing date the accountant knows the obligation but is not settling it. It represents the landlord, so it is treated as that person's account. The entry shows this directly. At the year end the adjusting entry debits the Rent account and credits the Outstanding Rent account. The debit puts the full year's rent — paid and unpaid alike — into the Profit and Loss Account, which is the matching principle at work. The credit creates the liability, which is carried to the Balance Sheet and stands there until the landlord is paid, when it is debited and extinguished. Applying the personal-account rule, debit the receiver and credit the giver: the landlord has given the use of the premises without yet being paid, so he is credited. The same class covers the whole family of period-end adjustments built on the same logic — outstanding salaries and outstanding wages, prepaid insurance and prepaid rent, accrued interest receivable, and income received in advance. Each of them represents somebody: a creditor for the unpaid ones, a debtor for the prepaid ones.

• (a)Natural personal account — Right family, wrong branch. A natural personal account is opened in the name of an actual human being — if the books carried 'Mr. Sharma's account' for the same unpaid rent, that would be a natural personal account. 'Outstanding rent' names no one. It is a heading under which an amount due to a person is parked, which is precisely what makes the account representative rather than natural. The distinction is worth holding because the debit-the-receiver rule applies identically to both.
• (c)Real account — Real accounts relate to the assets and properties of the business — tangible ones such as cash, stock, building, furniture and machinery, and intangible ones such as goodwill, patents and trademarks. Their rule is debit what comes in and credit what goes out. Outstanding rent is not a possession of the business at all; it is an obligation of the business, sitting on the liabilities side of the Balance Sheet. The fact that it, like a real account, survives into the next accounting year is what makes this option tempting, but persistence is a feature of every Balance Sheet item, not a definition of a real account.
• (d)Nominal account — This is the option most candidates lose the mark to, because the word 'rent' is in the stem and the Rent account IS a nominal account — nominal accounts cover expenses, losses, incomes and gains, and their rule is debit all expenses and losses, credit all incomes and gains. But 'Rent A/c' and 'Outstanding Rent A/c' are two different accounts created by a single adjusting entry, and only the first is nominal. There is a clean test: every nominal account is closed off to the Trading or Profit and Loss Account at the year end and carries no balance forward, whereas outstanding rent is carried forward and shown as a liability. An account that appears in the Balance Sheet cannot be nominal.

The traditional or British classification divides every ledger account into three classes and attaches a golden rule to each. Personal accounts — natural, artificial and representative — follow debit the receiver, credit the giver. Real accounts, being assets, follow debit what comes in, credit what goes out. Nominal accounts, being expenses, losses, incomes and gains, follow debit all expenses and losses, credit all incomes and gains. Representative personal accounts are the class that exists because of accrual accounting: an expense belongs to the period in which the benefit was consumed, not the period in which cash moved, so at every closing date a set of balances has to be created for benefits consumed but not paid for and for payments made for benefits not yet consumed. Those balances all represent somebody. The modern or American classification restates the same facts as assets, liabilities, capital, revenue and expenses, and there outstanding rent is simply a current liability; it is worth being fluent in both, because a question may be framed in either language.

Classifying an account correctly is the step before every journal entry, so the paper tests it early and tests it with a phrase that straddles two classes. The examiner's trick here is lexical — the word 'rent' pulls towards the nominal class while the word 'outstanding' pulls towards the personal class, and the answer belongs to whichever word describes the BALANCE rather than the expense. The habit rewarded is asking what would happen to this account at the year end: if it is closed to the Profit and Loss Account it is nominal, and if it is carried into the Balance Sheet it is not.

• Traditional classification: personal accounts (natural, artificial, representative), real accounts (assets), nominal accounts (expenses, losses, incomes, gains).
• A representative personal account represents a person or a group of persons rather than naming one — outstanding rent represents the landlord.
• Golden rules: debit the receiver and credit the giver; debit what comes in and credit what goes out; debit expenses and losses and credit incomes and gains.
• Year-end entry: Rent A/c Dr., To Outstanding Rent A/c — the debit reaches the Profit and Loss Account, the credit becomes a liability.
• Outstanding rent appears on the liabilities side of the Balance Sheet and is extinguished when the landlord is paid.
• Other representative personal accounts: outstanding salaries and wages, prepaid insurance and prepaid rent, accrued income, and income received in advance.
• Nominal accounts are closed off each year and carry no balance forward; balances that appear in the Balance Sheet are therefore never nominal.
• Under the modern classification the same item is simply a current liability.

• Classifying by the noun in the account name — 'rent' is nominal, 'outstanding rent' is not.
• Calling any liability a real account because it survives into the next year.
• Assuming a representative personal account must be a liability; prepaid rent is the same class and is an asset.
• Applying the wrong golden rule and crediting the account when the landlord is finally paid, instead of debiting it.

Account classification comes up in EO/AO papers as a single-line item like this one, and the phrases chosen are almost always the borderline ones — outstanding or prepaid expenses, accrued income, capital, drawings, goodwill, bank overdraft. Learn the three-way classification with two examples of each branch, then rehearse the year-end adjusting entries, because the second question in this family asks for the entry rather than the class.

No directly related past PYQ was found.

• practice — not a real PYQ

  'Prepaid insurance' is an example of :

  • (a)Nominal account
  • (b)Representative personal account
  • (c)Artificial personal account
  • (d)Real account

  Answer(b) Representative personal account

• practice — not a real PYQ

  The year-end adjusting entry for salaries earned by employees but not yet paid is :

  • (a)Outstanding Salaries A/c Dr. — To Salaries A/c
  • (b)Salaries A/c Dr. — To Outstanding Salaries A/c
  • (c)Salaries A/c Dr. — To Cash A/c
  • (d)Profit and Loss A/c Dr. — To Cash A/c

  Answer(b) Salaries A/c Dr. — To Outstanding Salaries A/c