Different Types of Accounts in Accounting You Must Know

Every financial transaction in a business, from paying salaries to purchasing equipment, is recorded under a specific type of account. Accountants classify these transactions to keep financial records organised and understand how money flows within a business.

Without these classifications, accounting would become confusing, as businesses would struggle to track expenses, identify income sources, calculate profits, manage liabilities, and prepare financial statements. Let’s understand the different types of accounts in accounting and the golden rules used to record them correctly.

What are the 3 Types of Accounts in Accounting?

Let’s understand different types of accounts in detail:

1. Personal Account in Accounting

The personal account is an account that records transactions associated with a person, organisation, bank, or institution. Personal accounts aid organisations in keeping track of their payments, receipts, and balances.

There are three types of personal accounts in accounting:

Natural Personal Account

The natural personal account is owned by real humans or individuals. Such accounts are created in the names of individuals for the recording of personal financial transactions. They assist organisations in keeping track of transactions made with individuals.

Examples:

• Account of Rahul Sharma
• Account of Neha Verma
• Account of Amit Singh

Artificial Personal Account

Companies, banks, institutions, or organisations own the artificial personal account. Even though these are not humans, they are considered individuals in accounting. Artificial personal accounts are maintained for transactions done with business institutions.

Examples:

• Account of ABC Pvt. Ltd.
• Account of XYZ Bank
• Account of State Bank of India

Representative Personal Account

The representative personal account is an indirect representation of the individual or individuals concerned. This type of personal account is generally opened to cater to outstanding expenses and incomes, as well as prepaid expenses and incomes.

Examples:

• Outstanding Salary Account
• Prepaid Insurance Account
• Rent Outstanding Account

Golden Rule of Personal Account

The following points explain how personal accounts are treated in accounting transactions:

• Debit to the Receiver: This refers to debiting the person who receives value.
• Credit to the Giver: This refers to crediting the person who gives value.

This principle is applied in all personal accounts in accountancy. It assists in recording transactions between two parties. Personal accounts may consist of any individual, firm, bank, or institution.

2. Real Account in Accounting

A real account is an account that contains all the assets belonging to the organisation. The real account is used to compute the total value of the assets belonging to the firm. The assets may be tangible (can be touched physically) or intangible (cannot be touched physically).

Tangible Real Account

Tangible real accounts include those that have physical existence and are physically available for use or are tangible in nature. Tangible assets participate in various activities and are recorded in the books of accounts on the basis of their cost of acquisition and are subject to depreciation.

Examples

• Account for Building
• Machinery Account
• Account for Furniture
• Land Account
• Account for Vehicle

Intangible Real Account

Intangible real account refers to the intangible assets that have some monetary worth; however, they cannot be touched and are very important for the reputation of the company. These assets are recorded in the accounting books even if they do not exist physically.

Examples:

• Account for Goodwill
• Account for Patent
• Account for Trademark
• Account for Copyright.
• Account for Brand Value

Golden Rule of Real Account

Here’s how real accounts are treated in accounting:

• Debit what comes in: Any asset or value that enters the business is debited.
• Credit what goes out: Any asset or value that leaves the business is credited.

3. Nominal Account in Accounting

The nominal account includes all the expenditures, losses, revenues, and gains of a business concern. Such an account is never carried forward into the next year; however, it is simply closed by transferring its balance to the Profit and Loss Account at the end of each year.

Nominal accounts help in knowing whether there is any gain or loss by a business concern during an accounting period.

Expenditures and Losses

Expenditures and losses are the amounts paid by the company in carrying out its business activities or losses incurred during the course of business activities. These accounts reduce business income and are classified as nominal accounts.

Examples

• Wages expense account: Payments made to the employees for their hard work
• Rent expense account: Payments made for the usage of premises
• Electricity bill expense account: Payments made for the usage of electricity in business

Revenues and Profits

Revenues and profits include the profits generated by the company through its business or any other means. These accounts contribute to the earnings and profitability of the business.

Examples:

• Interest Receivable Account: Revenue generated due to deposits or lending money
• Commission Receivable Account: Revenue generated due to services rendered
• Discount Receivable Account: Advantage enjoyed at the time of purchasing goods

Golden Rule of Nominal Account

The golden rule for nominal accounts in accounting is:

• Debit all expenses and losses: Any expense or loss of the business is debited.
• Credit all incomes and gains: Any income or gain of the business is credited.

Difference Between Personal, Real, and Nominal Accounts

The table below highlights the key differences between personal, real, and nominal accounts. It is very important to comprehend these differences so as to record the business transactions systematically.

Read Also: Top 7 Different Sources of Business Finance

To Conclude

Understanding the different types of accounts in accounting, including Personal Accounts, Real Accounts, and Nominal Accounts, is essential for properly recording and classifying business transactions.

Each type of account serves a specific purpose according to the golden rules of accounting. Personal accounts relate to individuals and organisations, real accounts relate to assets and property, and nominal accounts relate to income, expenses, gains, and losses.

FAQs

What do you mean by the golden rule of accounting?

The golden rule of accounting refers to the basic principles used to record financial transactions correctly in bookkeeping and accounting.

What type of account is GST?

GST is treated as a personal account under the traditional accounting approach, as it represents an amount payable to or receivable from the government.

What type of account is prepaid expense?

A prepaid expense account is a type of personal account, specifically a representative personal account. While it may look like a regular expense, which would be a nominal account, it is treated as a personal account because it is essentially a claim or advance owed to you by a specific entity.

Is cash a real account?

Yes, cash is a type of tangible real account because it is a tangible asset owned by an entity.

What is the use of classifying accounts in accounting?

Classifying accounts in accounting helps entities record, organise, and track financial transactions accurately. Accountants can identify the nature of each transaction and apply the correct accounting treatment.