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Classification of Accounts
Transactions can be divided into three categories.
i. Transactions relating to individuals and firms
ii. Transactions relating to properties, goods or cash
iii. Transactions relating to expenses or losses and incomes or gains.
Therefore, accounts can also be classified into Personal, Real and Nominal.
Personal Accounts
The accounts which relate to persons. Personal accounts include the following.
i. Natural Persons : Accounts which relate to individuals. For example, Mohan’s A/c, Shyam’s A/c etc.
ii. Artificial persons : Accounts which relate to a group of persons or firms or institutions. For example, HMT Ltd., Indian Overseas Bank, Life Insurance Corporation of India, Cosmopolitan club etc.
iii. Representative Persons: Accounts which represent a particular person or group of persons. For example, outstanding salary account, prepaid insurance account, etc.
The business concern may keep business relations with all the above personal accounts, because of buying goods from them or selling goods to them or borrowing from them or lending to them. Thus they become either Debtors or Creditors.
The proprietor being an individual his capital account and his drawings account are also personal accounts.
Impersonal Accounts
All those accounts which are not personal accounts. This is further divided into two types viz. Real and Nominal accounts.
Real Accounts
Every Business has some assets and every asset has an account. Real accounts are accounts relating to properties and assets which are owned by the business concern. There are two types of assets:
Tangible assets are touchable assets such as plant, machinery, furniture, stock, cash, etc.
Intangible assets are non-touchable assets such as goodwill, patent, copyrights, etc.
Real accounts include tangible and intangible accounts. For example, Land, Building, Goodwill, Purchases, etc.
Nominal Accounts
These accounts do not have any existence, form or shape. Since this account does not represent any tangible asset, it is called nominal or fictitious account. They relate to incomes and expenses and gains and losses of a business concern. All kinds of expense account, loss account, gain account or income accounts come under the category of nominal account. For example, rent account, dividend account, salary account, electricity expenses account, interest income account, etc.
Rules of debit and credit (classification based)
1. Personal accounts :
Debit the receiver
Credit the giver (supplier)
2. Real accounts :
Debit what comes in
Credit what goes out
3. Nominal accounts :
Debit expenses and losses
Credit incomes and gains
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