An account is an individual accounting record of increase and decrease in a specific asset, liability or owner’s equity items. – Accounting Principles – “Weygandt, Kieso & Kimmel”.

For determining the debit and credit in accounting, its classification is very important. Each transaction has two sides. One side is debit and the other is credit. The classification of accounts is essential for the purpose for which accounting is maintained in a business organization.

Types of Accounts Under Modern Rules

► Asset Accounts: An asset account is a separately maintained in the organization to track different types of assets. Accounts like Cash, Accounts Receivable, Inventory, Building, Plant and Machineries etc., increase with debits and decrease with credits.

► Liability Accounts: A liability account is created when goods are purchased on credit or when a loan is taken. Accounts like Accounts Payable, Loans Payable, etc., increase with credits and decrease with debits.

► Equity Accounts: The capital account in accounting represents the financial position of an owner’s equity in a business, encompassing initial investments, withdrawals, and retained earnings. Increase with credits and decrease with debits.

► Revenue Accounts: When earnings generated through the sale of goods or services called Revenue Accounts. These accounts increase with credits and decrease with debits.

► Expense Accounts: In accounting detail, expense accounts created when the costs incurred by an organization in its operations, including expenses for supplies, salaries, rent, utilities, and other necessary expenditures. These accounts increase with debits and decrease with credits.

► Drawings Accounts: When business owners uses cash or goods for personal or family needs, a separate account is maintained in the owner’s name to track these transactions. This account is called Drawings Accounts. As withdrawals increase, the owner’s capital decreases.

Classification of Account Under Traditional Method

Under the traditional method, accounts are classified into 3 main categories:

1) Personal Accounts, 2) Real Accounts, 3) Nominal Accounts

1) Personal Account: An account maintained in the name of various individuals or organizations is called a personal account. For example, John Smith’s account, Tom Hanks’ account, XYZ Bank account, ZYX Housing account, etc.

Personal accounts are further divided into three categories.

► Natural Personal Accounts: These refer to accounts of individuals, such as Mr. John Smith or Ms. Mary Brown.
► Artificial Personal Accounts: These refer to accounts of entities that are not natural persons but are treated as persons in accounting, such as companies, organizations, and institutions (e.g., ABC Ltd., XYZ Bank).
► Representative Personal Accounts: These represent a certain group of people rather than an individual or entity. For example, outstanding wages account (representing the employees to whom the wages are payable), prepaid expenses, or accrued incomes.

2) Property Account: An account kept separately in the name of each asset present in the organization is called a property account. For example, cash account, bank account, furniture account, building account.

Real accounts are further divided into two categories.

► Tangible Real Accounts: These refer to physical assets that can be touched and measured, such as machinery, buildings, furniture, and cash.
► Intangible Real Accounts: These refer to non-physical assets that cannot be touched but have value, such as goodwill, patents, trademarks, and copyrights.

3) Nominal or Income-Expense Account: Accounts related to income, expenses, and profit and loss are called nominal or income-expense accounts.

• Income Accounts: Sales, received commission, received rent, etc.
• Expense Accounts: Wages, salaries, rent, advertisements, etc.
• Profit Accounts: Profit from the sale of furniture, profit sent in export business.
• Loss Accounts: Loss due to fire damage.
• If any nominal account is associated with advance, outstanding, payable, and receivable, it is considered a personal account.

Golden Rules for Accounting:

Personal Accounts: Debit the receiver, credit the giver.
Real Accounts: Debit what comes in, credit what goes out.
Nominal Accounts: Debit all expenses and losses, credit all incomes and gains.

Category Based Accounts Group

More Resources

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