Accounting is referred as the language of business and helps us to understand the financial impact of various transactions. In this article we are going to discuss about the traditional classification of accounts in three categories i.e. Real, Personal and Nominal account and also we will discuss the golden rules of accounting.
Account
Before understanding the meaning of different types of accounts it should be clear that what account is ? So account is particularly record of all business transactions that can be shown in monetary form. Like - cash account shows all the cash transactions of the entity in the relevant accounting period etc.
This account is particularly related with persons. Its various types are :
1. Natural Personal Account - It includes the god’s creations i.e. human beings. Therefore, natural personal account include human beings with flesh and blood. Example- Ram account, Geeta’s Account , Ash’s account etc.
2. Artificial Personal Account - This includes entities created by human beings those who have separate existence in the eyes of law. In reality they are not physically present but are existing in business dealings . Example- Private companies, Public companies , Banks etc.
3. Representative Personal Account - These are those accounts which represent the certain group or group of persons . Example- Outstanding Expenses, Accrued Income, Prepaid Expenses, Income received in advance.
For example :
- Rohan gave Rs. 20,000 as loan to company.
In this case Rohan is the giver of Rs. 20,000 so his account will be credited.
- Goods sold to Shreya on credit for Rs.40,000
In this case Shreya received the goods so her account will be debited.
II) Impersonal Account
It includes all the accounts which are not of persons i.e. accounts of assets, expenses, incomes etc. The major two sub categories under this are :
1. Real Account
Real account is related with the assets or the properties owned by the entity. Under this assets are broadly classified into two categories :
a) Tangible Assets - Assets which have physical existence are considered as tangible assets . One can see as well as touch them. Example - Machinery, Cash, Building, Furniture etc.
b) Intangible Assets - Assets which do not have any physical existence but still economic benefit can be derived from them are known as intangible assets. Example - Copyright, Patents, Trademarks etc.
For example :
- ABC co. purchased building for Rs. 100,000
In this case company purchases the building so building becomes part of company’s assets and hence will be debited whereas cash is paid for buying building so cash account will be credited.
2. Nominal Account
Nominal account is also called temporary account as ledger accounts under this category are closed every year to find out the profit earned or loss incurred by the company. Under this account four important things are covered, i.e.,
a) Expenses - Purchase of raw material, Wages, salaries, Rent, Insurance Premium, Electricity Charges etc.
b) Income - Sales, Interest received, Rent received, Sale of old newspaper, Dividend received etc.
c) Loss - Loss on sale of asset, Loss by fire, Loss by theft etc.
d) Gain - Gain on sale of fixed asset etc.
For example :
- Salary paid to employees Rs.10,000
In this case salary is an expense so salary account will be debited
- Interest received Rs. 5000
In this case interest is income so interest account will be credited
Proper understanding of these three accounts helps in journalizing and understanding the foundations of financial accounting. For more such posts stay tuned with us at Ace Your Grades.
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Real, personal and Nominal account meaning with examples :
Golden Rules of Accounting :
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Thank you for the information.
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