Prepaid salary is which type of account?

Correct option is A

Introduction:

Prepaid salary is an amount paid in advance to employees before it becomes due. Since this represents an advance given to a person or entity, it is classified as a Personal Account.

According to the classification of accounts:

• 1. Personal Accounts deal with persons, companies, or organizations. Prepaid salary is considered an advance, which is essentially a payment to a specific individual or group.
  2. Real Accounts represent assets or liabilities that are tangible or intangible. Prepaid salary does not fit this category as it is not an asset in the traditional sense.
  3. Nominal Accounts relate to expenses, incomes, losses, and gains. Since prepaid salary is not an expense (it is paid in advance and will become an expense later), it is not classified as a nominal account.

Thus, Prepaid Salary = Personal Account.

Information Booster:

1. Personal Account Rules:

   • Debit the receiver.
   • Credit the giver.
     Prepaid salary represents an amount given in advance to employees, which is why it falls under this category.

2. Examples of Personal Accounts:

   • Prepaid Expenses (e.g., prepaid rent, prepaid insurance, prepaid salary).
   • Debtors.
   • Creditors.

3. Journal Entry for Prepaid Salary:

   • When prepaid salary is recorded:
     Prepaid Salary A/c Dr.
            To Cash/Bank A/c

Additional Knowledge:

• ​Real accounts represent tangible or intangible assets, such as machinery, cash, or goodwill. Prepaid salary does not belong to this group.
• ​Nominal accounts are temporary accounts related to income, expenses, and losses/gains. Prepaid salary is an advance payment and not an expense incurred yet.
• Prepaid salary is solely a Personal Account because it deals with payments made to individuals or entities in advance.