What are the Three Type of Accounts?

Real, Personal and Nominal Accounts

There are mainly three type of accounts in accounting: Real, Personal and Nominal accounts, personal accounts are classified under three subcategories: Artificial, Natural and Representative. If you fail to identify an account correctly as either a real, personal or nominal, in most cases, you will get the journal entries incorrect.

 

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. A 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. A 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  Furniture is real a/c so Dr. What comes in
   To Cash A/C  Credit  Cash is a real a/c so Cr. What goes out

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


 

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 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 so a/c Dr. the receiver
   To Bank A/C  Credit  Artificial personal so a/c Cr the giver

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


 

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 so Dr. all expenses
   To Cash A/C  Credit    Real A/C so Cr what goes out

Amount will be 15,000 in both debit and credit.