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 cant 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 gods creations who have the ability to deal,
who, in most cases, are people. E.g. Kumars A/C, Adams 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. Lets 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.
