What are the types of Accounts?
According to the double-entry method of book-keeping, accounts are divided into three parts in order to cover all the transactions of an organization. Each account has a certain golden rule of Debit and Credit.
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The Accounts are:
1. Personal Account
The accounts of an individual or an organisation with whom your business has direct transaction are called personal accounts. Some examples of personal accounts are customers, retailers, a salary accounts of employees, etc.
Natural Person’s Account- These persons could be individual people like Rama’s A/c, Anil’s a/c, driver’s A/c etc.
Artificial Person’s Account-The persons could also be artificial persons like organisations, corporate or association of persons or partnerships etc. Accordingly, we could have Philips Industries A/c, IBM Technologies A/c and more.
Representative Personal Account- There could be representative personal accounts as well. Although the individual identity of persons related to these is known, the system is to reflect them as collective accounts. e.g. when monthly salary is payable to, we know how much is payable to each of the employee, but collectively, the account is called as ‘Salary Payable A/c’.
The golden rule of Personal Accounts-
“Debit the receiver; Credit the giver”
Example
The transaction below shows the interaction between two different personal accounts, one of which is a salary of the auditor and the other one is a bank.
Paid Mr Shitam 24,000 by check
2. Real Account-
Business’s assets fall under Real accounts. Assets could be tangible and intangible. The real account is balance sheet accounts which are used for recording assets, liabilities and owner’s equity.
Tangible Real Account- These accounts are related to the assets which can be touched or felt. For eg, furniture, machinery etc.
Intangible Real Account- These accounts are related to the assets which cannot be felt or touched. For eg, goodwill, patents, trademarks, etc.
The golden rule for Real Accounts-
“Credit what goes out; Debit what comes in”
Example
The transaction below shows the interaction of two different real accounts: one is machinery and the other is cash. Both of them are assets in a firm, hence, we use Real accounts.
Purchased machine for RS 15000 in cash
3. Nominal Account-
Nominal accounts record all the revenue and incomes of the business in a period of time. Basically, accounts which are concerned with income, profits and losses are Nominal accounts. For example-
Purchase a/c, salary a/c, sales a/c, etc.
The result from Nominal accounts are the firm’s profit or loss, it is then transferred to capital account.
The golden rule of Nominal Accounts-
“Debit all the Expenses and Losses; Credit all Income and gains”
Example
The following example shows a transaction where a nominal account interacts with a real a/c.
Purchased raw material for 15,000 in cash
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Some more examples of these 3 golden rules of Accounting-
1. Sapna started a Firm with Rs 10,00,000.
Accounts were chosen- Cash – Real Account, Sapna’s capital – Personal Account.
Cash Account- Debit the Capital by 10,00,000
Capital Account- Credit the Cash by 10,00,000
Few Other Accounts-
Whatever may be the number of accounting heads, firm’s accounting is divided into three types of accounts i.e. Real A/c's, Nominal A/c's and Personal A/c's.
Where the information needed by the firm is very less, it can account for the transactions relating to its business with a minimum of four accounting heads.
Assets and Liabilities A/c
Assets A/c-
All in information about assets and debtors of the organisation is recorded under one a/c known as Assets a/c. All the real accounts and personal accounts transaction about debtors are put under assets account.
Asset a/c will take the place of Machinery A/c, Bank A/c, Cash A/c, etc.
Liabilities A/c-
All the liabilities on an organization are recorded under this type of account. Liabilities are generally from the personal accounts of loaned capital or creditors and owned capital of the company.
Liabilities A/c will replace all capital A/c, Mr Suresh’s a/c(the creditor).
Incomes/Gains & Expenses/Losses
Expenses/Losses A/c-
All the transactions related to income and losses are recorded under this account. It contains all the information regarding any expenses and losses of the organisation.
All the nominal accounts relating to expenses and losses are written under expenses/losses A/c.
Income and Gains A/c-
All the incomes and gains of an organization are written under Income/gains A/c.
FAQs on Types of Accounts
1. What are the three main types of accounts in accounting according to the traditional classification?
In accounting, transactions are classified into three main types of accounts to ensure systematic recording. These are:
- Personal Accounts: These accounts relate to individuals, firms, companies, or institutions. Examples include a customer's account, a supplier's account, or a capital account.
- Real Accounts: These accounts are related to all the assets and properties of the business, both tangible and intangible. Examples include cash, machinery, buildings, goodwill, and patents.
- Nominal Accounts: These accounts are associated with all business expenses, losses, incomes, and gains. Examples include salaries, rent, sales, and commission received.
2. What are the 'Golden Rules of Accounting' for each type of account?
The three Golden Rules of Accounting are fundamental principles that guide the process of debiting and crediting accounts:
- For Personal Accounts: Debit the receiver, Credit the giver.
- For Real Accounts: Debit what comes in, Credit what goes out.
- For Nominal Accounts: Debit all expenses and losses, Credit all incomes and gains.
These rules form the foundation of the double-entry bookkeeping system.
3. Can you explain a Personal Account with its different categories and examples?
A Personal Account is an account related to persons or legal entities with whom the business deals. It is further divided into three categories:
- Natural Personal Accounts: These are accounts of human beings, such as Anil's Account or Rama's Account.
- Artificial Personal Accounts: These are accounts of organisations, institutions, or corporate bodies that are recognised as persons in business dealings, like Philips Industries A/c or a bank account.
- Representative Personal Accounts: These accounts represent a certain person or a group of persons. For example, 'Salary Payable Account' represents the employees to whom salaries are due.
4. What is the difference between a Real Account and a Nominal Account?
The primary difference lies in what they track. A Real Account tracks the assets and liabilities of a business and its balances are carried forward to the next financial year, appearing in the Balance Sheet. In contrast, a Nominal Account tracks the incomes, expenses, gains, and losses for a specific accounting period. At the end of the year, its balance is transferred to the Trading and Profit & Loss Account and is not carried forward.
5. Why is a bank account treated as a Personal Account when it holds cash, which is a Real Account?
This is a common point of confusion. A bank account is classified as a Personal Account because it represents the business's dealing with the bank, which is an institution or an 'Artificial Person'. The rule 'Debit the receiver, Credit the giver' applies to the bank as an entity. While the cash itself is a Real Account (an asset), the bank account reflects the relationship and transactions with the banking institution.
6. How does the modern classification of accounts (Assets, Liabilities, Equity, Revenue, Expenses) relate to the traditional three types?
Both systems are used to categorise transactions, but they group them differently. The traditional system (Personal, Real, Nominal) is rule-based, while the modern system is equation-based (Assets = Liabilities + Equity). Here's how they relate:
- Assets: This corresponds to Real Accounts (like machinery, cash) and some Personal Accounts (like debtors).
- Liabilities & Equity: These correspond to Personal Accounts (like creditors, capital account).
- Revenue & Expenses: These directly correspond to Nominal Accounts (like sales, rent, salaries).
The modern approach is often considered more intuitive for understanding the direct impact on a company's financial statements.
7. Why are intangible assets like 'Goodwill' or 'Patents' classified as Real Accounts?
Real Accounts encompass all assets of a business, not just those that are physical. While you cannot touch Goodwill or a Patent, they are classified as Intangible Real Accounts because they are valuable properties owned by the business. They have a measurable monetary value and provide future economic benefits, which is the core definition of an asset. Therefore, they fall under the Real Account category, and the rule 'Debit what comes in, Credit what goes out' applies to them.
