Raghav Grover

Real, Personal and Nominal | Types of Accounts

When you buy or sell goods and services, you must update your business accounting books by
recording the transaction in the proper account. This shows you all the money coming into and going
out of your business. And, you can see how much money you have in each account. Sort and track
transactions using accounts to create financial statements and make business decisions.

Financial Accounting has its origin in the “Principle of Duality” and thus follows the Double-Entry
Accounting System. The Double-Entry Accounting System means that with every transaction,
simultaneously two accounts are impacted. For example, Shaw Pvt. Ltd. buys 5,000 units of raw
material worth Rs 5 lakhs for its business. In this transaction, Shaw Pvt. Ltd. is receiving raw material
in exchange of cash worth Rs 5 Lakhs. To put it otherwise, raw material is coming into the business
whereas cash worth Rs 5 lakh is going out of the business. Hence, it results in a transaction that
affects the raw material’s stock increasing the same by 5,000 units. At the same time, it also affects
cash available with the business, thereby reducing it by Rs 5 lakh. This is what is termed as the
‘Double Entry System’ of accounting which is usually followed while preparing account books of a
business. So, it is seen that the ‘Dual Accounting Concept’ states that each business transaction has
an equal and at the same time opposite effect in the minimum of two different accounts.

WHAT IS AN ACCOUNT?

An account is a detailed outline of the transactions that are carried out by the specific business in
respect of a particular person or a firm or their representatives or objects. For example, when a
business carries out transactions with customers and suppliers, both suppliers as well as customers
are termed as separate accounts. Similarly, businesses sometimes purchase tangible items like land,
machinery, plant, building, etc., each of the tangibles are treated as individual accounts though such
types of accounts are related to things.

Therefore, whenever a business carries out transactions, it has to mark the accounts involved and
identify them. The next step to be followed then is applying the necessary accounting standards and
golden accounting rules to keep a record of such transactions. Furthermore, an account is typically
recorded in a T-Format. A T-Account has two sides to it. The debit side is the name given to the left
side of an account whereas the right side is called the credit side.

Types of Accounts

 Personal Account

o Personal Representative Account

o Personal Artificial Account

o Personal Natural Account

 Real Account
Raghav Grover

o Real Intangible Account

o Real Tangible Account

 Nominal Account

1. PERSONAL ACCOUNT

As stated earlier, personal accounts are those accounts that are related to an individual, a company,
a firm or a group of associations etc. These persons might incorporate natural persons, artificial
persons or representative persons, as the case may be.

For example – Manoj and Saroj trading Co., Charitable trusts, ABC Bank Ltd, X company Ltd., etc.

There are some accounts that might come under the category of personal representative account.
For instance – When we speak of salary, it means how much amount is payable to each of the
employees. But all salary accounts are clubbed collectively under an account called ‘salary payable
A/c’.

Rule for this Account

1. The Receiver is debited

2. The Giver is credited.

Type of Personal Accounts

a. Natural Persons

These types of accounts are related to individuals or natural persons like Ranveer’s A/c, Aryan’s A/c,
Ritwik’s A/c etc.

b. Artificial Accounts

These accounts are related to various companies and institutions like Roy Brothers Pvt Ltd A/c, Lion’s
Club A/c, etc. Thus, such types of institutions and companies are those entities that are there in the
eyes of law.

c. Representative Accounts

Accounts that represent a specific purpose of work are called representative accounts. For instance,
Outstanding Wages A/c, Outstanding Interest A/c, Prepaid Expense A/c, etc.

Golden rule that is related to the personal account is:

1. The receiver is debited,

2. The giver is credited.

Raghav Grover

Illustration:

Siddharth bought some machinery from M/s Surana & Sons worth Rs 10,00,000/- on credit. So we
see that this particular transaction affects two accounts: first, the Personal Account of M/s Surana &
Sons and the Machinery Account. Thus, this transaction implies that Siddharth has purchased the
Machinery from M/s Surana & Sons for his business. The Golden Rule of Personal Account states,
“Debit the Receiver, Credit the Giver”.

Machinery Account

Particulars Amount Particulars Amount

To M/s Surana 10,00,000

M/S Surana A/C

Particulars Amount Particulars Amount

By Machinery 10,00,000

2. REAL ACCOUNT

Real Accounts are those accounts that relate to assets, properties or possessions. These related
properties might exist in physical or non-physical form. This gives rise to the need for creation of two
types of real accounts:

a. Tangible Real Accounts

The term tangible real accounts suggests those accounts that are physical in nature. In other words,
these assets are visible to the eyes. Such assets can be touched, seen or felt. For instance, Building
A/c, Vehicle A/c, Machinery A/c, etc.

b. Intangible Real Accounts

This type of account suggests those accounts that relate to assets or possessions that are non-
physical in nature. In other words these assets cannot be seen, felt or touched but can be measured
in terms of some amount of money. One can say that some value is attached to these types of
assets.

For example: goodwill, patent, trademarks, copyrights etc.

Golden Rule relating to this type of personal account:

What comes in is to be debited

What goes out is to be credited
Raghav Grover

Illustration:

Siddharth bought a vehicle for the purpose of his business which is worth Rs 5,00,000 in cash. So,
this type of transaction involves two real accounts: A vehicle Account and Cash Account.

Hence, buying a vehicle worth Rs 5,00,000 in cash implies that a vehicle is being added into the
business. At the same time cash is going out of the business. Therefore, the golden rule of real
account states, “Debit What Comes in, Credit What Goes Out”.

Both cash and vehicle being real accounts, hence, Rs 5,00,000 will be debited to vehicle A/c. But the
same sum will be credited to cash A/c.

Vehicle A/C

Particulars Amount Particulars Amount

To Cash 5,00,000

Cash A/C

Particulars Amount Particulars Amount

By Vehicle 5,00,000

3. NOMINAL ACCOUNT

Nominal accounts are those types of accounts that are related to any form of income or
expenditure, gain or loss. For example Rent A/c, Salary A/c, Wages A/c, etc.

Golden rule for such accounts:

All types of expenditure and losses relating to the business are to be debited.

All forms of income of business and gains, if any are to be credited.

For Example – Whenever any salary is given to employees of the business entity salary A/c is debited
or whenever any other expenses are incurred it is debited. On the contrary, when the business gets
any discount, interest, etc these are credited whenever received by the business entity.

In addition, there are some other types of accounts in accounting that are as follows :

Cash Account – This type of account keeps records of payments that are done by cash, deposits and
withdrawals.

Income Account – This type of account is to keep a track of all types of income sources of business.

Expense Account – This type of account records all the expenditure of the business.

Liabilities – This type of account takes care of any form of debt or loan under liabilities.

Equities – If there exists any form of investment of the account owner or investment of common
stocks, retained earnings then such entries will fall under the account type equities.
Raghav Grover

All transactions of a business entity should be recorded in account books. To record these
transactions the business entity should pass journal entries which will be then entered into ledgers.
The journal entries are passed according to the Golden Rules of accounting. In order to apply these
rules, the type of account is to be ascertained first and then these rules are applied thereafter:

Debit is something that comes in, credit is something that goes out

The receiver is to be debited, the giver is to credit

All expenses are to be debited and all income is to be credited

So, in this way, the foundation of accounting is laid. Above mentioned rules are known as the Golden
Rules of accounting. These rules are just like the letters of the English alphabet. For instance, one can
write in English only if he knows how to write the English alphabet. Similarly for accounting, if one
does not have knowledge of the above-mentioned golden rules, one will not be able to pass journal
entries and therefore will not be able to account accurately for the transactions.