Types of Accounts in Accounting

Accounting is vital for any business owner, manager, or professional. It helps you track your income, expenses, assets, liabilities, and equity. Accounting also allows you to prepare financial statements, reports, and budgets. It relies on a system of recording and classifying transactions into different types of accounts. Here, we will explain what accounts are and how many types of accounts are there.

What are Accounts?

An account is a record of all the transactions related to a particular item or category. For example, if you buy a laptop for your business, you will record this transaction in an account called “Laptop.” An account shows the balance or the net amount of the item or category at any point in time. An account can also show the changes or movements in the balance over a period.
You can classify accounts into three main categories: personal, real, and nominal. These categories depend on the nature and characteristics of the items or categories they represent. Let us understand each type of account in detail.

Different Types of Account

Here is a detailed explanation of the three types of accounts. 

1. Personal Account

A personal account is a type of account that relates to a person or an entity that has a legal personality. A person or entity with a legal personality can engage in contracts, possess property, initiate lawsuits, face legal actions, and so on. Examples of this type of account in commerce are:

• Customers
• Suppliers
• Employees
• Banks
• Shareholders
• Partners
• Government

You can further classify this type of account in accounting into three types: natural, artificial, and representative persons.

• Natural persons are humans with the legal capacity to enter into contracts and transactions. For example, Ram, Shyam, Geeta, etc.
• Artificial persons are entities created by law and have a legal personality separate from their owners or members. The most common examples are ABC Ltd., the State Bank of India, and the Government of India.
• Representative persons are accounts that represent a group of natural or artificial persons or a specific aspect of their transactions. Some typical examples include- agents, attorneys, and executors

The rule for recording transactions in personal accounts is:

• Debit the receiver
• Credit the giver

This means that when a person or an entity receives something from another person or an entity, you debit the receiver’s account and credit the giver’s account. For illustration, suppose Ram sells goods worth ₹ 10,000 to Shyam on credit. In this case, Ram is the giver, and Shyam is the receiver. Therefore, you will debit Shyam’s account and credit Ram’s account as follows:

Account	Debit (₹)	Credit (₹)
Shyam’s A/c	10,000
Ram’s A/c		10,000

2. Real Account

This type of account relates to an asset or a property with a physical existence or something you can measure in terms of money. Examples of this type of account in accounting are:

• Cash
• Bank
• Inventory
• Machinery
• Land
• Building
• Investments

You can further classify real accounts into two types: tangible and intangible.

• Tangible real account: This type of account relates to assets or properties that have a physical existence, and you see or touch them. For example, Cash A/c, Furniture A/c, Building A/c, Stock A/c, etc.
• Intangible real account: It relates to assets or properties that do not have a physical existence but have a value based on their rights or benefits—for example, Goodwill A/c, Patent A/c, Trademark A/c, etc.

The rule for recording transactions in real accounts is:

• Debit what comes in
• Credit what goes out

That means when you acquire an asset or a property, you debit its account. And when you dispose of an asset or a property, you credit its account.

For illustration, suppose Ram purchases furniture worth ₹ 50,000 in cash. In this case, furniture is coming in, and money is going out. Therefore, you will debit Furniture A/c and credit Cash A/c as follows:

Account	Debit (₹)	Credit (₹)
Furniture A/c	50,000
Cash A/c		50,000

3. Nominal Account

A nominal account is a type of account that relates to an income, an expense, a loss, or a gain that does not have a physical existence but affects the profit or loss of the business. Examples of nominal accounts are:

• Sales
• Purchases
• Rent
• Salary
• Interest
• Depreciation
• Bad debts

You can further classify this type of account into the following types: 

• Income accounts are those that record the inflow of money or benefits from the sale of goods or services or other sources. For example, Sales A/c, Interest Received A/c, Commission Received A/c, etc.
• Expense accounts: These types of accounts record the outflow of money or benefits for purchasing goods, services, or other purposes. For example, Purchase A/c, Salary A/c, Rent A/c, etc.
• Gain accounts: These types of accounts relate to the increase in the value of an asset or a decrease in the value of a liability due to favourable changes in market conditions or other factors. For example, Profit on Sale of Asset A/c, Discount Received A/c, etc.
• Loss accounts: These types of accounts record the decrease in an asset’s value or an increase in the value of a liability due to unfavourable changes in market conditions or other factors. Examples include Loss on Sale of Asset A/c or Discount Allowed A/c.

The rule for recording transactions in nominal accounts is:

• Debit all expenses and losses
• Credit all incomes and gains

That means when you incur an expense or suffer a loss, you debit its account. And when you earn an income or make a gain, you credit its account

For illustration, suppose Ram pays one of his employees a salary of ₹ 20,000. In this case, salary is an expense for Ram. Therefore, you will debit Salary A/c and credit Cash A/c as follows:

Account	Debit (₹)	Credit (₹)
Salary A/c	20,000
Cash A/c		20,000

Types of Accounts in Accounting: Fundamentals

The separate idea of business entity

We draw a clear separation between the business and the owner when accounting for a commercial organisation. All business transactions are documented from the business’s perspective rather than the owner’s perspective. To the degree that he acquires capital, the proprietor is regarded as a creditor of the organisation.

Concept of dual entry

Each financial transaction requires the recording of two accounting elements. For example, if a business sells items valued at Rs. 6,000, this transaction requires the recording of two accounting aspects. One is a 6,000-rupee stock decrease, while the other is a 6,000-rupee cash receipt. A double-entry system is used to track these two facets of a single transaction. The entire amount deducted will always equal the total amount credited under this rule.

Concept of a continuing concern

Accounting is predicated on the assumption that businesses will continue to function for an extended length of time in the future. In other words, it is presumed that the organisation has neither the purpose nor the need of curtailing its commercial activities. This is the basis upon which a business entity’s financial statements are created and upon which investors agree to participate in the firm.

Concept of congruence

This notion stipulates that income and costs must be documented concurrently with their occurrence. In general, we reconcile revenues and costs within an accounting period. In general, revenue gained over time may be quantified only when it is compared to associated costs. Numerous adjustments are made for prepaid costs, accrued earnings, and so on while producing a period’s financial statements based on this idea.

Final Words

In accounting, accounts offer you several key advantages. They help you organise financial information efficiently, making tracking and managing your resources easier. Secondly, accounts enable you to monitor your income, expenses, and overall financial health, allowing for informed decision-making. Therefore, clearly understanding the types of accounts and their rules is crucial.

FAQs

Q1. What are the three types of accounts in accounting?

Ans: The three types of accounts in accounting are real, personal, and nominal accounts. This classification depends on the nature of transactions and the rules to record them.

Q2. What is a real account?

Ans: A real account is an account that relates to the assets of a business, which can be tangible or intangible. Real accounts include cash, furniture, machinery, goodwill, etc.

Q3. What is a personal account?

Ans: A personal account is an account that relates to the persons or entities involved in a business transaction, such as customers, suppliers, creditors, or debtors. Personal accounts can be natural, artificial, or representative.

Q4. What is a nominal account?

Ans: A nominal account relates to a business’s income, expenses, gains, or losses. Nominal accounts include sales, rent, salary, interest, etc.

Q5. What is the golden rule for real accounts?

Ans: The golden rule for real accounts is to debit the receiver and credit the giver. That means the business debits an asset when it comes in and credits it when it goes out.

Q6. What is the golden rule for personal accounts?

Ans: The golden rule for personal accounts is debiting the giver and crediting the receiver. That means when a person contributes something to the business, the business debits it, and when it receives something from the business, it credits it.

Q7. What is the golden rule for nominal accounts?

Ans: The golden rule for nominal accounts is to debit all expenses and losses and credit all incomes and gains. That means when the business incurs an expense or loss, it debits it, and when it generates revenue or profits, it credits them.

Q8. What is a T-account?

Ans: A T-account is a graphical representation of an account in a T-shaped format. It has two sides: the left side is the debit side, and the right is the credit side. You can record transactions on either side, depending on the nature of the account.

Q9. How are accounts classified under the modern approach?

Ans: In the modern approach, you can classify accounts into two major groups: assets and liabilities. You can further subdivide assets into current and non-current assets and categorise liabilities into current and non-current liabilities.