There are 3 types of accounts, Personal, Real, and Nominal account.
Types of Accounts in Accounting
- Personal Account:
A personal account is a general ledger account. All accounts related to persons, whether natural persons like individuals or artificial persons like companies, fall in this category. In the case of a personal account, when a business receives something from another business or individual, the first business becomes the receiver, and the second business or individual from which it was received becomes the giver. Golden Rule 1 says, Debit the receiver, credit the giver. Applying the rule to our example, the books should reflect a debit on the personal account and a credit on the business account. Let’s take the example of buying a gift from a gift shop. In your account, the transaction will reflect as such.
2. Real Account
In a real account, the closing balance is retained and carried forward at the end of the year. These accounts usually pertain to assets, liabilities, and equity. In a real account, if a business receives something of value (property or goods), it is represented in the books as debited. If something of value goes out from the business it is represented in the books as credited. An example is given below. The example below is of a furniture purchase worth Rs. 10000 in cash.
|XXXX||Furniture Account||Rs. 20000|
|Cash Account||Rs. 20000|
3. Nominal Account:
It is the type of account in which all accounting transactions are stored for one fiscal year, transferring balances to permanent accounts at the end of a fiscal year. This allows for resetting the balances to zero and starting afresh. Nominal accounts are usually related to Revenues, Expenses, Gains, and Losses. Golden Rule 3 says, Debit all expenses and losses, credit all incomes and gains. If a business incurs a loss or expense, then the books’ respective entry is represented as a debit. If the business earns a profit or gains income by way of rendering services, then the entry in the book is represented as credit. An example below demonstrates this. A business pays rent for the premises it holds and is an expense for the business.