What are the Three Types of Accounts?

Real, Personal and Nominal 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.

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.

Three Types of Accounts in Accounting
Three Types of Accounts

 

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.

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

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 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.

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 Pvt Ltd. 24,000 by check
Accounts Involved Debit/Credit Rule Applied
Unreal Pvt Ltd. A/C  Debit Artificial Personal – Dr. the receiver
To Bank A/C  Credit Artificial 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, 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.

Golden rule for nominal accounts

 Debit all expenses & losses
 Credit all incomes & gains

 

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
To Cash A/C Credit  Real A/C – Cr. what goes out

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

 

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