Menu Close

Types of Accounts [Personal, Real and Nominal]

Under the traditional classification, The types of accounts are;

  1. Personal account
  2. Real account
  3. Nominal account

These are the three main types of accounts that we use to record financial transactions and events of a company.

Under modern classification, the types of accounts are;

  1. Asset
  2. Liability
  3. Capital
  4. Expenses/Losses
  5. Revenues/Gains

types of accounts

To understand each type of account, we must know first, “What is Account?

Account Definition:

Accounts are the basic storage units for accounting data. We use them to accumulate amounts from similar transactions.

In simple words, An account is a heading name given to any asset or liability or income or expense in the ledger that we use to accumulate amounts from similar transactions

An accounting system has a separate account for each asset, each liability, and each component of the owner’s equity, including revenues and expenses.

In manual accounting, An account is created in the general ledger in a T shape which has a left‐hand side, called the debit side, and a right‐hand side called the credit side.

T-Account

An account is debited when an amount is entered on the left‐hand side and credited when an amount is entered on the right‐hand side.

In accounting,  we use accounts to record all the financial transactions and events. 

Traditional Classification

1. Personal Account

Accounts that deals with persons, i.e. human beings and artificial persons such as companies, government organizations, HUF, etc. Personal Accounts are classified into:

(a) Natural Personal Accounts:- All personal accounts that are concerned with natural human beings are called natural personal accounts. It includes Accounts of individuals such as;

  • Rohit’s account
  • Ram’s account
  • Rupa’s account

(b) Artificial Personal Accounts:- All the entities which have a separate legal identity in the eye of the law are covered under this category.

Therefore, the accounts of clubs, charitable trust, company, bank, etc are artificial personal accounts such as;

  • Bank Account (SBI -XXXX6486)
  • ABC limited
  • Western Club
  • Women Welfare Trust

(c) Representative Personal Accounts:-  These are not in the name of any person or entity but they represent a person or group of persons. Examples of these accounts are :

  • Capital Account
  • Drawing Account
  • Accounts payable
  • Accounts receivable
  • Tax payable
  • Tax receivable 
  • Outstanding expenses

2. Real Account

Assets are the resources that a business owns and that can be usefully expressed in monetary terms.

Assets are items of value used by the business in its operations. For example;

Machinery, Vehicles, Land & building, Equipment, etc are assets that are used by the business in its operations.

Hence, assets provide economic benefits to the business. 

All assets except personal accounts, which are tangible or intangible, fall under the category “Real Accounts“.

Tangible real accounts are related to things that can be touched and felt physically. Few examples of tangible real accounts are

  • building,
  • machinery,
  • stock,
  • land, 
  • cash
  • office equipment

Intangible real accounts are related to things that can’t be touched and felt physically. Few examples of such real accounts are

  • goodwill,
  • patents,
  • trademark
  • software
  • website

3. Nominal Account

Those accounts which are associated with income, gains, losses or expenses are known as Nominal Account. The net result of all nominal accounts is reflected as a profit or loss which is transferred to capital account.

Here are some examples of nominal accounts:

Income & Gains Accounts:

  • Sales account
  • Interest earned
  • Commission earned
  • Profit on sale of investment

Expense & Losses Accounts:

  • Purchase account
  • Rent account
  • Wages & salary
  • Office expense
  • Printing and stationary
  • Loss on sale of fixed asset

Modern Classification

Under the modern classification, all accounts are divided into five categories for the purposes of recording the transactions:

  1. Asset
  2. Liability
  3. Capital
  4. Expenses/Losses
  5. Revenues/Gains

1. Asset Account

Assets are the economic resources that a company owns. Assets are used by the company in its operations to generate sales and profits. 

An account receivable is an example of an asset account. Accounts receivable are amounts owed to an entity by customers to whom the entity has provided goods or services on credit. 

The Accounts Receivable account is often called the Trade Debtors account or simply Debtors.

Other examples of asset accounts;

  • Cash
  • Cash at bank
  • land & buildings
  • Equipment

2. Liability Account

Liabilities are obligations or debts that an enterprise has to pay at some time in the future.

an account payable is an example of a liability account. An account payable is an obligation to pay an amount to an outside party (a creditor) for the purchase of goods, supplies or services on credit.

The account payable is also commonly called Trade Creditors or simply Creditors.

Other examples of liability accounts;

  • Account receivable 
  • Interest Payable
  • Income Taxes Payable
  • Advances from Customers

3. Capital Account

Amount invested by the owner in the business is known as capital.

It may be brought in the form of cash or assets by the owner for the business entity.

Capital is an obligation and a claim on the assets of the business because the owner of the business is considered a separate entity for accounting purposes.

It is, therefore, shown as capital on the liabilities side of the balance sheet.

4. Expenses/Losses

Nominal accounts that are associated with expenses or losses are kept under this category such as;

  • Purchase account
  • Rent account
  • Wages & salary
  • Office expense

5. Revenues/Gains

Nominal accounts that are associated with incomes or gains are kept under this category such as;

  • Sales account
  • Interest earned
  • Commission earned

Related Posts

Leave a Reply

Your email address will not be published. Required fields are marked *