Types of Accounts

Different Types of Accounts

In accounting, there are three main types of accounts. These classifications help in organizing and recording financial transactions systematically. Below is a detailed explanation of each type.

1. Personal Account

A Personal Account is an account that relates to individuals or entities that possess a legal personality. A person or entity with legal personality can engage in contracts, own property, sue or be sued, and perform other legal actions.

Examples of Personal Accounts:

• Customers: Individuals or entities that purchase goods or services from a business.
• Suppliers: Individuals or companies that provide goods or services to a business.
• Employees: Individuals who work for the business and receive compensation.
• Banks: Financial institutions with which the business has transactions.
• Shareholders: Owners or investors in the business.
• Partners: Co-owners of the business in a partnership.
• Government: Legal entities that regulate or interact with the business for taxation or compliance purposes.

Classification of Personal Accounts:

Personal accounts can be further categorized into three types based on the nature of the person or entity involved:

1. Natural Persons:

• Natural persons are human beings who have the legal capacity to engage in contracts and transactions.
• Examples: Ram, Shyam, Geeta, etc.

2. Artificial Persons:

• Artificial persons are entities created by law that have a separate legal personality, distinct from their owners or members.
• Examples: Companies such as ABC Ltd., financial institutions like the State Bank of India, and government bodies like the Government of India.

3. Representative Persons:

• Representative persons are accounts that represent a group of individuals or artificial entities, or a specific aspect of their transactions.
• Examples: Agents, attorneys, executors, or trustees acting on behalf of individuals or organizations.

Rule for Personal Accounts:

The rule for recording transactions in personal accounts follows this principle:

• Debit the Receiver
• Credit the Giver

This means that when a person or entity receives something from another, you debit the account of the receiver and credit the account of the giver.

Example:

• If a customer pays cash to purchase goods, the business will:
  • Debit: Cash (the business receives cash)
  • Credit: Customer’s account (the customer gives the money) 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:

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2. Real Account

A Real Account is an account that relates to an asset or property, which can either have a physical existence or be measurable in terms of money. These accounts track the value of tangible and intangible assets owned by the business.

Examples of Real Accounts:

• Cash: Physical money that the business holds.
• Bank: Money deposited in bank accounts.
• Inventory: Goods available for sale or use in production.
• Machinery: Equipment used for manufacturing or other business activities.
• Land: Property owned by the business.
• Building: Physical structures owned by the business.
• Investments: Financial investments made by the business.

Classification of Real Accounts:

Real accounts can be further categorized into two types based on the nature of the asset:

1. Tangible Real Account:

• A Tangible Real Account refers to assets that have a physical existence, meaning they can be seen or touched.
• Examples:
  • Cash Account: Physical currency held by the business.
  • Furniture Account: Furniture items owned by the business.
  • Building Account: Property and buildings owned by the business.
  • Stock Account: Inventory of goods available for sale.

2. Intangible Real Account:

• An Intangible Real Account refers to assets that do not have a physical form but represent value based on rights or benefits.
• Examples:
  • Goodwill Account: The value of a business’s reputation.
  • Patent Account: Rights to produce and sell certain products or inventions.
  • Trademark Account: Brand names or symbols that are legally protected.

Rule for Real Accounts:

The rule for recording transactions in real accounts is:

• Debit what comes in
• Credit what goes out

This means that when the business acquires an asset or property, you debit the account of the asset to reflect that it has come into the business. Conversely, when the business disposes of or uses an asset, you credit the account of the asset to show that it has left the business.

Example:

• If a business purchases machinery for cash:
  • Debit: Machinery Account (as machinery is coming into the business)
  • Credit: Cash Account (as cash is going out of the business)

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:

This rule ensures that the movement of assets is accurately reflected in the financial records.

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3. Nominal Account

A Nominal Account is an account that relates to income, expense, loss, or gain that does not have a physical existence but directly affects the profit or loss of a business. These accounts help in tracking the business’s performance by recording financial transactions that impact the income statement.

Examples of Nominal Accounts:

• Sales Account: Records the revenue earned from selling goods or services.
• Purchases Account: Records the cost of goods bought for resale or production.
• Rent Account: Tracks rent expenses paid by the business.
• Salary Account: Records the wages or salaries paid to employees.
• Interest Account: Tracks interest earned or paid.
• Depreciation Account: Reflects the reduction in value of assets over time.
• Bad Debts Account: Records the amount of debts that are unlikely to be recovered.

Classification of Nominal Accounts:

Nominal accounts can be categorized into the following types:

1. Income Accounts:

• Income accounts record the inflow of money or benefits from the sale of goods, services, or other sources.
• Examples:
  • Sales Account: Records income from selling goods or services.
  • Interest Received Account: Tracks interest earned by the business.
  • Commission Received Account: Records income from commissions earned.

2. Expense Accounts:

• Expense accounts record the outflow of money or benefits for purchasing goods, services, or other expenses incurred by the business.
• Examples:
  • Purchases Account: Records the cost of goods purchased for business use.
  • Salary Account: Tracks the payment of salaries to employees.
  • Rent Account: Records payments made for rent.

3. Gain Accounts:

• Gain accounts record an increase in the value of an asset or a decrease in the value of a liability due to favorable changes in market conditions or other factors.
• Examples:
  • Profit on Sale of Asset Account: Records the profit made from selling an asset.
  • Discount Received Account: Tracks discounts received by the business on purchases.

4. Loss Accounts:

• Loss accounts record a decrease in the value of an asset or an increase in the value of a liability due to unfavorable changes in market conditions or other factors.
• Examples:
  • Loss on Sale of Asset Account: Records the loss incurred from selling an asset.
  • Discount Allowed Account: Tracks discounts given to customers, which is considered a loss for the business.

Rule for Nominal Accounts:

The rule for recording transactions in nominal accounts is:

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

This means:

• When the business incurs an expense or suffers a loss, you debit the respective nominal account.
• When the business earns income or makes a gain, you credit the respective nominal account.

Example:

• If the business pays rent:

  • Debit: Rent Account (as it is an expense)
  • Credit: Cash or Bank Account (as cash or bank balance decreases)

• If the business earns revenue from sales:

  • Debit: Cash or Bank Account (as cash or bank balance increases)
  • Credit: Sales Account (as it represents income earned by the business)

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: Nominal accounts ensure that all income, expenses, gains, and losses are accurately recorded, which ultimately determines the business’s profit or loss at the end of a financial period.

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