Real, Personal and Nominal Accounts

There are mainly three types of accounts in accounting: Real, Personal and Nominal, personal accounts are classified into three subcategories: Artificial, Natural, and Representative.

If you fail to identify an account correctly as either a real, personal or nominal account, in most cases, you will get end up recording incorrect journal entries.

 

1. Real Accounts

All assets of a firm, which are tangible or intangible, fall under the category of ‘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

Credit What Goes Out

 

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
Furniture A/C	Debit	Real A/C – Dr. what comes in
To Cash A/C	Credit	Real A/C – Cr. what goes out

*Amount will be 10,000 in both debit and credit.

Related Topic – Step by Step Process to Create a Journal Entry

 

2. Personal Accounts

Second among three types of accounts are personal accounts which are related to individuals, firms, companies, etc. Few examples are debtors, creditors, banks, outstanding account, prepaid accounts, accounts of 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. private companies, LLCs, LLPs, clubs, schools, etc.

Representative personal accounts: Accounts which 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

Credit the giver

 

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 Company 24,000 by check

Accounts Involved	Debit/Credit	Rule Applied
Unreal Company A/C	Debit	Personal – Dr. the receiver
To Bank A/C	Credit	Personal – Cr. the giver

*Amount will be 24,000 in both debit and credit. 

Related Topic – Difference between Journal and Ledger

 

3. Nominal Accounts

Accounts which 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 accounting sense too, furthermore nominal accounts do not really exist in physical form, but behind every nominal account money is involved.

Example – Purchase A/C, Salary A/C, Sales A/C, Commission received A/C, Bad Debt 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 and losses

Credit all incomes and gains

 

Example

The following example shows a transaction where a nominal account interacts 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
To Cash A/C	Credit	Real A/C – Cr. what goes out

The amount will be 15,000 in both debit and credit.

 

To Summarize,

 

>Read Three Golden Rules of Accounting with Examples

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