Define Traditional Approach
The Traditional Approach distinguishes the accounts while the modern approach implements the accounting equation required for accounting. Under the traditional approach, the ledger accounts are then classified into - Personal and Impersonal accounts. The rules of debit and credit that are directed in this traditional approach are the golden rules.
The traditional Approach classifies accounts while the Modern approach uses the Accounting equation for accounting. All the ledger accounts are classified as ‘Personal’ and ‘Impersonal accounts’ under the Traditional approach.
Certain rules apply for Debit and Credit in the Traditional approach, such as
Debit is what comes in whereas credit is what goes out.
Debit refers to the expenses and the losses, and
Credit refers to the income and gains.
Traditional Approach of Financial Accounting
The financial accounts are to be classified into two types of approaches. First, according to the traditional approach also known as the British approach. The other is the Modern approach also known as the American approach. The Key factors under the Traditional approach are the personal and impersonal accounts which we will further illustrate in the prevailing sections.
Financial Accounts are Classified into:
The Traditional Approach to Financial accounting is also referred to as the British approach
The Modern approach, or also referred to as the American approach.
Traditional account, accounts are classified into
Personal Accounts, and
Impersonal Accounts.
Personal Accounts
These accounts are accounts that belong to human beings or natural persons and even artificial persons. Personal accounts are further classified into:
Natural persons, Artificial persons, Representative persons.
We will understand the mentioned in detail.
Natural Persons
Natural persons are human beings. In this case, we include accounts belonging to humans, meaning respective accounts are owned by individual persons. So, Debtor’s A/c., then the Creditor’s A/c., Proprietor’s A/c., Proprietor’s Capital A/c., Proprietor’s Drawings A/c. all fall under this category.
Artificial Persons
These are the persons who are not human beings but legally can act and work like humans. As mentioned, artificial persons, possess a separate identity in the eyes of law. Thus, they can enter into any contractual agreements. With this, they qualify to be penalized too. HUF also known as the Hindu undivided families, partnership firms, the co-operative societies, associations of persons, companies, the municipal corporations, even the hospitals, baking sectors, government bodies, etc all are artificial persons under the eyes of the law.
Representative Persons
As suggested by the name, these accounts merely represent the accounts of the persons. These persons may be natural and even artificial. The nominal accounts of expenses and incomes which are outstanding, pre-paid, accrued, or unearned, fall under this representative person’s category. Thus, Wages Outstanding A/c, Prepaid Rent A/c, Accrued Interest A/c, Unearned Commission A/c, etc. come into this category.
Impersonal Accounts
Accounts that are not included in the Personal Accounts, Impersonal Accounts fall under two categories.
1) Real accounts and 2) Nominal accounts.
Real Accounts
Real Accounts are related to all the assets and liabilities of a business and these accounts are not closed at the end of the accounting year. They continue to appear in the financial statement of a company, in the Balance Sheet and carried forward to the upcoming accounting year.
These are permanent accounts and they fall into the following categories :
Tangible Real Account are those assets, properties, or possessions that can be touched, seen or measured. Some examples of this are the Building A/c, Furniture A/c, Cash A/c.
Intangible Real Account comprises all assets and possessions which one cannot touch, see or measure, and these have a monetary value. These can be bought and sold even. Certain examples are Goodwill, Patents, Copyrights, Trademark, etc.
Nominal Accounts
Nominal Accounts are accounts that are related to the expenses, the losses, the incomes, and the gains, and these are temporary accounts. The balances of these are transferred to the Trading and Profit and Loss A/c at the end of the accounting year. These accounts don't have a balance that needs to be carried forward to the next year.
FAQs on Traditional Approach to Business Management
1. What is the traditional approach to business management?
The traditional approach to business management, also known as the classical approach, is an early management theory that focuses on improving organisational efficiency and productivity. It views an organisation as a machine and its employees as components. This approach is primarily built on three key pillars: F.W. Taylor's Scientific Management, Henri Fayol's Administrative Principles, and Max Weber's Bureaucracy, all of which emphasise structure, hierarchy, and formal authority.
2. What are the main characteristics of the traditional management approach?
The traditional approach to management is defined by several key characteristics that prioritise order and efficiency. These include:
- Formal Structure: A clear, hierarchical organisational structure with a well-defined chain of command.
- Emphasis on Efficiency: The primary goal is to maximise output and productivity through scientific methods and task specialisation.
- Top-Down Authority: Decisions are made by top-level management and flow downwards to employees.
- Impersonal Nature: Rules and controls are applied uniformly and impersonally, focusing on the position rather than the person.
- Economic Motivation: It assumes that employees are primarily motivated by financial incentives and rewards.
3. What is the main difference between the traditional and modern approaches to management?
The primary difference lies in their focus and flexibility. The traditional approach is rigid, task-oriented, and hierarchical, treating employees as cogs in a machine. In contrast, the modern approach is flexible, people-oriented, and often democratic. It recognises the importance of employee satisfaction, creativity, and social needs in achieving organisational goals, favouring teamwork and collaboration over a strict top-down command structure.
4. Can you give an example of the traditional management approach in a modern company?
A classic example of the traditional approach in a modern setting can be seen in large-scale manufacturing plants or fast-food chains like McDonald's. These organisations rely heavily on principles of scientific management to ensure consistency and efficiency. Tasks are highly standardised, there is a clear division of labour (e.g., cashier, cook, cleaner), and a distinct hierarchy of authority (crew member, shift manager, store manager) is in place to maintain control and streamline operations.
5. How did Henri Fayol's 14 principles contribute to the traditional approach?
Henri Fayol's 14 principles provided the first comprehensive framework for general management, forming a core part of the traditional approach. Principles such as Division of Work, Authority and Responsibility, Unity of Command, and Scalar Chain established a blueprint for creating a structured, orderly, and efficient organisation. They gave managers clear guidelines on how to direct and control business operations from the top down, reinforcing the hierarchical nature of classical management theory.
6. Why is the traditional approach to management often criticised in today's business world?
The traditional approach faces criticism today primarily because of its rigidity and lack of focus on the human element. Its major drawbacks include:
- It often stifles employee creativity and initiative by focusing strictly on predefined tasks and rules.
- Its hierarchical structure can slow down decision-making in fast-paced, dynamic markets.
- It largely ignores the psychological and social needs of employees, which can lead to low morale and high turnover.
- It assumes a one-size-fits-all solution, which is less effective in diverse and complex modern organisations.
7. In what types of industries is the traditional management approach still effective?
Despite its criticisms, the traditional approach remains highly effective in specific environments where consistency, safety, and precision are critical. It is well-suited for large-scale manufacturing industries, where assembly-line processes require standardisation. It is also valuable in organisations like the military, hospitals, and government agencies where a clear chain of command and strict adherence to procedures are essential for operational success and safety.
