Types of Accounts: Real, Personal & Nominal

Financial Accounting has its origin in the ‘Principle of Duality’. This principle says that each and every business transaction that is written in accounts books has an effect that is twofold. In other words, every transaction has to involve at least 2 accounts while being recorded in account books. . Let’s understand accounting account types with an example.

For example, Shaw Pvt. Ltd. buys 5,000 units of raw material worth Rs 5 lakhs for its business. In this transaction, Shaw Pvt. Ltd. is receiving raw materials in exchange for cash worth Rs 5 Lakhs. To put it otherwise, raw material is coming into the business whereas cash worth Rs 5 lakh is going out of the business.

Hence, it results in a transaction that affects the raw material’s stock increasing the same by 5,000 units. At the same time, it also affects the cash available to the business, thereby reducing it by Rs 5 lakh. This is what is termed the ‘Double Entry System’ of accounting which is usually followed while preparing the account books of a business. So it is seen that the ‘Dual Accounting Concept’ states that each business transaction has an equal and at the same time opposite effect in the minimum of two different accounts. Let’s understand the fundamentals of accounting accounts and more in detail.

Golden Rules of Accounting

An account is a detailed outline of the transactions that are carried out by a specific business in respect of a particular person or a firm or their representatives or objects. Here’s a simple accounting golden rules example to make you understand golden rules applicability.

For example, when a business carries out transactions with customers and suppliers, both suppliers, as well as customers, are termed separate accounts.

Similarly, businesses sometimes purchase tangible items like land, machinery, plant, building, etc., and each of the tangibles is treated as an individual account though such types of accounts are related to things.

Therefore, whenever a business carries out transactions, it has to mark the accounts involved and identify them. The next step to be followed then is applying the necessary accounting standards and accounting golden rules to keep a record of such transactions. Furthermore, an account is typically recorded in a T-Format. A T-Account has two sides to it. The debit side is the name given to the left side of an account whereas the right side is called the credit side.

Now that you have understood the golden rules of accounting, let’s move ahead with account classification types.

How Many Types of Accounts in Accounting Are There?

Broadly, there are three types of accounts accounting that you must know about. The different accounting types of accounts and their rules are as follows:-

• Personal Account
  • Personal Representative Account
  • Personal Artificial Account
  • Personal Natural Account
• Real Account
  • Real Intangible Account
  • Real Tangible Account
• Nominal Account

A Real Account can also be called a general ledger account that relates to assets and liabilities other than people accounts. These accounts are accounts that don’t need to be closed at the end of the financial year because they are carried forward to the next year. A simple example of a real account is a bank account. There are different types of ledger accounts or real accounts.

A personal account can be called a general ledger account that is connected to all persons or people like individuals, different firms, or associations. A creditor account is an example of a personal account.

A simple nominal account definition states that it is a general ledger account that keeps a record of all income and expenditure, gains and losses. One of the examples that can help you understand nominal accounts is an interest account.

1. What is a Personal Account?

A simple personal account definition states that: Personal accounts are those accounts that are related to an individual, a company, a firm or a group of associations, etc. These persons might incorporate natural persons, artificial persons, or representative persons, as the case may be.

For example – Manoj and Saroj Trading Co., Charitable Trusts, ABC Bank Ltd, X company Ltd., etc.

There are some accounts that might come under the category of personal representative accounts.

For instance – When we speak of salary, it means how much amount is payable to each of the employees. But all salary accounts are clubbed collectively under an account called ‘salary payable A/c’.

The rule for Personal Accounts are:

• The receiver is debited
• The Giver is credited.

Types of Personal Accounts

a. Natural Persons

These types of accounts are related to individuals or natural persons like Ranveer’s A/c, Aryan’s A/c, Ritwik’s A/c, etc.

b. Artificial Accounts

These accounts are related to various companies and institutions like Roy Brothers Pvt Ltd A/c, Lion’s Club A/c, etc. Thus, such types of institutions and companies are those entities that are there in the eyes of law.

c. Representative Accounts

Accounts that represent a specific purpose of work are called representative accounts. For instance, Outstanding Wages A/c, Outstanding Interest A/c, Prepaid Expense A/c, etc.

The golden rule that is related to the personal account is:

1. The receiver is debited,

2. The giver is credited.

Here’s an example of personal account with illustration to help you understand better: 

Siddharth bought some machinery from M/s Surana & Sons worth Rs 10,00,000/- on credit. So we see that this particular transaction affects two accounts: first, the Personal Account of M/s Surana & Sons and the Machinery Account. Thus, this transaction implies that Siddharth has purchased the Machinery from M/s Surana & Sons for his business. The Golden Rule for Personal Account states, “Debit the Receiver, Credit the Giver”.

As in this transaction, M/s Surana & Sons is the Giver, his Personal Account shall be credited with Rs 10,00,000. On the other hand Machinery, A/c shall be debited with the same sim of money. Therefore, this particular transaction is being recorded in the following manner in the respective accounts:

Note: You can also use this as a ledger account example in certain cases.

2. What is a Real Account?

A simple real account definition says that: Real Accounts are those accounts that relate to assets, properties, or possessions. These related properties might exist in physical or non-physical forms. This gives rise to the need for the creation of two types of real accounts:

Intangible Real Accounts and Tangible Real Accounts.

a. Tangible Real Accounts

The term tangible real accounts suggest those accounts that are physical in nature. In other words, these assets are visible to the eyes. Such assets can be touched, seen, or felt. For instance, Building A/c, Vehicle A/c, Machinery A/c, etc.

b. Intangible Real Accounts

This type of account suggests those accounts that relate to assets or possessions that are non-physical in nature. In other words, these assets cannot be seen, felt, or touched but can be measured in terms of some amount of money. One can say that some value is attached to these types of assets.

For example, goodwill, patent, trademarks, copyrights, etc.

The Golden Rule for real account are:

• What comes in is to be debited
• What goes out is to be credited

Here’s an example of real account to help you understand this type of account better:

Siddharth bought a vehicle for the purpose of his business which is worth Rs 5,00,000 in cash. So, this type of transaction involves two real accounts: A vehicle Account and Cash Account.

Hence, buying a vehicle worth Rs 5,00,000 in cash implies that a vehicle is being added to the business. At the same time, cash is going out of the business. Therefore, the golden rule of real accounts states, “Debit What Comes in, Credit What Goes Out”.

Both cash and vehicle are real accounts, hence, Rs 5,00,000 will be debited to vehicle A/c. But the same sum will be credited to cash A/c.

So the following table shows the transaction thus recorded:

The above mentioned examples clears the concept of personal account vs real account.

3. What is a Nominal Account?

Nominal accounts are those types of accounts that are related to any form of income or expenditure, gain or loss. For example Rent A/c, Salary A/c, Wages A/c, etc.

The golden rule for nominal accounts:

• All types of expenditures and losses relating to the business are to be debited.
• All forms of income of business and gains, if any are to be credited.

A simple example of a nominal account can be seen: Whenever any salary is given to employees of the business entity salary A/c is debited or whenever any other expenses are incurred it is debited. On the contrary, when the business gets any discount, interest, etc these are credited whenever received by the business entity. Therefore, in debit all expenses and losses credit all incomes and gains.

In addition, there are some other types of accounts in accounting that are as follows :

• Cash Account – This type of account keeps records of payments that are done by cash, deposits, and withdrawals.
• Income Account – This type of account is to keep a track of all types of income sources of business.
• Expense Account – This type of account records all the expenditures of the business.
• Liabilities – This type of account takes care of any form of debt or loan under liabilities.
• Equities – If there exists any form of investment of the account owner or investment of common stocks, or retained earnings then such entries will fall under the account type equities.

All transactions of a business entity should be recorded in account books. To record these transactions the business entity should pass journal entries which will be then entered into ledgers. The journal entries are passed according to the Golden Rules of Accounting. In order to apply these rules, the type of account is to be ascertained first and then these rules are applied thereafter:

• Debit is something that comes in, credit is something that goes out
• The receiver is to be debited, the giver is to credit
• All expenses are to be debited and all income is to be credited

So in this way, the foundation of accounting is laid. Above mentioned rules are known as the Golden Rules of accounting. These rules are just like the letters of the English alphabet. For instance, one can write in English only if he knows how to write the English alphabet. Similarly for accounting, if one does not have knowledge of the above-mentioned golden rules, one will not be able to pass journal entries and therefore will not be able to account accurately for the transactions.

Key Benefits of Classification of Accounts in Accounting

Understanding the fundamental concepts of real personal and nominal accounts is essential for maintaining accurate financial records and ensuring compliance with established accounting principles. Here are some key benefits of classification of accounts in accounting:

• Separate Idea of Business Entity: Accounting emphasises a clear distinction between the business and its owner. All transactions are documented from the business’s perspective, not the owner’s. For example, if the proprietor invests capital in the business, it is recorded as a liability, treating the owner as a creditor to the business.

• Concept of Dual Entry: Each financial transaction is recorded with two accounting elements, ensuring balance. For instance, selling items worth Rs. 5,000 involves two entries: a Rs. 5,000 decrease in stick and a Rs. 5,000 increase in cash.

• Concept of Continuing Concern: Accounting assumes that businesses will continue to operate indefinitely. This principle forms the basis of preparing financial statements and encourages long-term investment decisions.

• Concept of Congruence: Revenue and expenses must be matched within the same accounting period. For instance, revenue earned during a period should align with associated costs such as accrued expenses or prepaid costs. Adjustments are made for prepaid expenses, accrued earnings, etc., to maintain accurate financial statements.

Advantages of Accounting Rules

The three golden rules of accounting form the foundation of any financial system, promoting integrity, accuracy, and consistency in financial transactions. These rules are essential for businesses to maintain error-free bookkeeping, meet regulatory requirements, and foster stakeholder confidence. Here are some advantages of following accounting rules in businesses and other cases:

• Consistency in Financial Recording: Adopting these rules ensures that all financial transactions are recorded in a uniform and standardised manner, providing a clear financial picture over time. This consistently allows businesses to compare performance across multiple financial periods. This aids in tracking growth and identifying trends.

• Transparency in Financial Statements: By following these rules, businesses maintain transparent and easily comprehensible financial records. Transparent records not only enhance trust among stakeholders but also make the financial statements auditable without risks of errors or misstatements.

• Compliance with Accounting Standards: The application of these rules helps businesses adhere to accounting standards such as GAAP (Generally Accepted Accounting Principles) and other government regulations. This compliance prevents potential legal liabilities and ensures alignment with industry best practices.

• Informed Decision-Making: Reliable financial records derived from these principles provide management with the data needed for strategic and data-driven decisions. For example, accurate records enable effective budgeting, forecasting, and financial analysis, which are crucial for sustained growth.

• Error Reduction in Financial Reporting: This structured approach of these rules minimises the risk of misclassification and omission of transactions, thereby ensuring error-free financial reporting. Accurate reporting fosters credibility and avoids complications during audits or stakeholder reviews.

Conclusion 

The world of accounting primarily has three different types of accounts: personal account, real account and a nominal account. Once you have understood these three accounts in detail, managing accounts and finances both personally and professionally becomes easier. The sole purpose of this read was to simplify some concepts that might appear complex to certain individuals and business owners.

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Types of Accounts in Accounting FAQs:

1. What is the chart of accounts in accounting?

The chart of accounts in accounting is a structured list of different types of accounts used to classify and categorize financial transactions. It typically includes assets, liabilities, equity, income, and expenses. Examples of types of accounts include Cash (an asset), Accounts Payable (a liability), Revenue (income), and Rent expenses (an expense). These accounts help organize financial data for accurate record-keeping and financial reporting.

2. What are the rules relating to different types of accounts?

In financial accounting, various types of accounts are utilized to categorize transactions. These can be broadly classified into asset, liability, equity, revenue, and expense accounts. For instance, asset accounts represent resources like cash or inventory, while liability accounts track obligations like loans. Equity accounts denote the owner’s stake, and revenue and expense accounts record income and costs, respectively. Specific account classifications may vary depending on the organization and industry

3. What are the 3 main ledger accounts?

In accounting, the three main types of ledger accounts are assets, liabilities, and equity. Assets encompass items like cash, inventory, and property. Liabilities include debts and obligations. Equity represents the owner’s interest in the business. For instance, cash in a checking account falls under the asset category, a loan payable is a liability, and retained earnings reflect equity. These categories are fundamental for financial accounting.

4. What are the main ledgers?

In accounting, the main ledgers encompass various types of accounts, categorizing financial transactions. These include asset accounts (e.g., cash, inventory), liability accounts (e.g., loans, accounts payable), equity accounts (e.g., owner’s equity), revenue accounts (e.g., sales, interest income), and expense accounts (e.g., rent, salaries). Each type serves a distinct purpose, enabling comprehensive financial tracking and reporting in the realm of financial accounting.

5. Which account is known as a general ledger account?

A real account is known as a general ledger account that is related to liabilities and assets.

6. What is an example of a nominal account?

Interest account is an example of a nominal account.

7. What is the golden rule for personal accounts?

The golden rules are receiver is debited and giver is credited.

8. What do tangible real accounts relate to?

Tangible real accounts related to physical things in nature.

9. Nominal account is related to which account?

Nominal accounts are those types of accounts that are related to any form of income or expenditure, gain or loss

10. What is a liability?

This type of account takes care of any form of debt or loan under liabilities.

11. What is an income account?

This type of account is to keep a track of all types of income sources of business

12. What is credit?

Credit is something which goes out i.e., spent.

13. What is the golden rule of accounting?

The expenses are always debited and income is credited.

14. What is debit?

Debit is something which comes in i.e., bought.

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