Types of Accounts
There are mainly three types of accounts in accounting: Real, Personal, and Nominal accounts, personal accounts are classified into three subcategories: Artificial, Natural, and Representative.
1. Real Accounts
All assets of a firm, 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, etc.
Intangible real accounts are related to things that can’t be touched and felt physically. Few examples of such real accounts are goodwill, patents, trademarks, etc.
The golden rule for real accounts
Debit what comes in
Example
The transaction below shows the interaction of two different real accounts: one is furniture and the other is cash, both of them are assets of the company and hence classified as real accounts.
∙ Purchased furniture for 10,000 in cash
Accounts Involved Debit/Credit Rule Applied
2. Personal Accounts
These accounts are related to individuals, firms, companies, etc. A few examples of personal accounts include debtors, creditors, banks, outstanding/prepaid accounts, accounts of credit customers, accounts of goods suppliers, capital, drawings, etc.
Natural personal accounts:
This type of personal accounts is the simplest to understand out of all and includes all of God’s creations who have the ability to deal, who, in most cases, are people. E.g. Kumar’s A/C, Adam’s A/C, etc.
Artificial personal accounts:
Personal accounts which are created artificially by law, such as corporate bodies and institutions, are called Artificial personal accounts. E.g. Pvt Ltd companies, LLCs, LLPs, clubs, schools, etc.
Representative personal accounts:
Accounts that represent a certain person or a group directly or indirectly. E.g. Let’s say that wages are paid in advance to an employee – a wage prepaid account will be opened in the books of accounts. This wages prepaid account is a representative personal account indirectly linked to the person.
The golden rule for personal accounts
Debit the receiver
Example
The transaction below demonstrates the interaction between two different personal accounts, one of which is a private limited company and the other one is a bank.
∙ Paid Unreal Pvt Ltd. 24,000 by check
Accounts Involved Debit/Credit Rule Applied
Unreal Pvt Ltd. A/C Debit Artificial Personal – Dr. the receiver
3. Nominal Accounts
Accounts that are related to expenses, losses, incomes, or gains are called Nominal accounts. The dictionary meaning of the word “nominal” is “existing in name only” and the meaning remains absolutely true in the accounting sense too, because nominal accounts do not really exist in physical form, but behind every nominal account money is involved. E.g. Purchase A/C, Salary A/C, Sales A/C, Commission received A/C, etc.
The final result of all nominal accounts is either profit or loss which is then transferred to the capital account.
The golden rule for nominal accounts
Debit all expenses & losses
Example
The following example shows a transaction where a nominal account deals with a real a/c. ∙ Purchased good for 15,000 in cash
Accounts Involved Debit/Credit Rule Applied
Purchase A/C Debit Nominal A/C – Dr. all expenses
Rules of Debit and Credit According to Modern Approach
If you are posting an entry in the journal, you may use the Modern Accounting Approach instead of the three golden rules of accounting.
| Type of Accounts | Debit | Credit |
|---|---|---|
| Assets A/c | Increase | Decrease |
| Lability A/c | Decrease | Increase |
| Capital A/c | Decrease | Increase |
| Revenue A/c | Decrease | Increase |
| Expenses A/c | Increase | Decrease |
| Drawing A/c | Increase | Decrease |
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