What are the types of Accounts?
According to the double-entry method of book-keeping, accounts are divided into three parts in order to cover all the transactions of an organization. Each account has a certain golden rule of Debit and Credit.
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The Accounts are:
1. Personal Account
The accounts of an individual or an organisation with whom your business has direct transaction are called personal accounts. Some examples of personal accounts are customers, retailers, a salary accounts of employees, etc.
Natural Person’s Account- These persons could be individual people like Rama’s A/c, Anil’s a/c, driver’s A/c etc.
Artificial Person’s Account-The persons could also be artificial persons like organisations, corporate or association of persons or partnerships etc. Accordingly, we could have Philips Industries A/c, IBM Technologies A/c and more.
Representative Personal Account- There could be representative personal accounts as well. Although the individual identity of persons related to these is known, the system is to reflect them as collective accounts. e.g. when monthly salary is payable to, we know how much is payable to each of the employee, but collectively, the account is called as ‘Salary Payable A/c’.
The golden rule of Personal Accounts-
“Debit the receiver; Credit the giver”
Example
The transaction below shows the interaction between two different personal accounts, one of which is a salary of the auditor and the other one is a bank.
Paid Mr Shitam 24,000 by check
2. Real Account-
Business’s assets fall under Real accounts. Assets could be tangible and intangible. The real account is balance sheet accounts which are used for recording assets, liabilities and owner’s equity.
Tangible Real Account- These accounts are related to the assets which can be touched or felt. For eg, furniture, machinery etc.
Intangible Real Account- These accounts are related to the assets which cannot be felt or touched. For eg, goodwill, patents, trademarks, etc.
The golden rule for Real Accounts-
“Credit what goes out; Debit what comes in”
Example
The transaction below shows the interaction of two different real accounts: one is machinery and the other is cash. Both of them are assets in a firm, hence, we use Real accounts.
Purchased machine for RS 15000 in cash
3. Nominal Account-
Nominal accounts record all the revenue and incomes of the business in a period of time. Basically, accounts which are concerned with income, profits and losses are Nominal accounts. For example-
Purchase a/c, salary a/c, sales a/c, etc.
The result from Nominal accounts are the firm’s profit or loss, it is then transferred to capital account.
The golden rule of Nominal Accounts-
“Debit all the Expenses and Losses; Credit all Income and gains”
Example
The following example shows a transaction where a nominal account interacts with a real a/c.
Purchased raw material for 15,000 in cash
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Some more examples of these 3 golden rules of Accounting-
1. Sapna started a Firm with Rs 10,00,000.
Accounts were chosen- Cash – Real Account, Sapna’s capital – Personal Account.
Cash Account- Debit the Capital by 10,00,000
Capital Account- Credit the Cash by 10,00,000
Few Other Accounts-
Whatever may be the number of accounting heads, firm’s accounting is divided into three types of accounts i.e. Real A/c's, Nominal A/c's and Personal A/c's.
Where the information needed by the firm is very less, it can account for the transactions relating to its business with a minimum of four accounting heads.
Assets and Liabilities A/c
Assets A/c-
All in information about assets and debtors of the organisation is recorded under one a/c known as Assets a/c. All the real accounts and personal accounts transaction about debtors are put under assets account.
Asset a/c will take the place of Machinery A/c, Bank A/c, Cash A/c, etc.
Liabilities A/c-
All the liabilities on an organization are recorded under this type of account. Liabilities are generally from the personal accounts of loaned capital or creditors and owned capital of the company.
Liabilities A/c will replace all capital A/c, Mr Suresh’s a/c(the creditor).
Incomes/Gains & Expenses/Losses
Expenses/Losses A/c-
All the transactions related to income and losses are recorded under this account. It contains all the information regarding any expenses and losses of the organisation.
All the nominal accounts relating to expenses and losses are written under expenses/losses A/c.
Income and Gains A/c-
All the incomes and gains of an organization are written under Income/gains A/c.
FAQs on Types of Accounts
1. What are the 4 main types of accounts?
Accounting typically categorizes financial transactions into four main types of accounts. These categories help organize, track, and report a company or individual's financial activities clearly and accurately. The 4 main types of accounts are:
- Assets: Items owned that hold economic value.
- Liabilities: Debts or obligations owed to others.
- Income/Revenue: Money received through business activities.
- Expenses: Costs incurred in the process of earning income.
2. What is the 3 type of account?
In traditional accounting, there are three fundamental types of accounts that summarize all financial transactions. These account types are essential for keeping books balanced and interpreting the flow of money.
- Personal Account: Relates to individuals, firms, and organizations.
- Real Account: Pertains to tangible and intangible assets like cash, equipment, or goodwill.
- Nominal Account: Deals with expenses, losses, incomes, and gains.
3. What are the 7 types of bank accounts?
Banks offer several types of accounts to meet different financial needs. While the exact options can vary by bank or country, there are seven common types of bank accounts:
- Savings Account: For saving money with interest earned.
- Current or Checking Account: For frequent deposits and withdrawals.
- Fixed Deposit Account: For locking money for a set period for higher interest.
- Recurring Deposit Account: For regular, fixed deposits over a period.
- Salary Account: For receiving monthly salaries.
- Joint Account: Operated by two or more individuals jointly.
- NRI Account: Designed for non-resident Indians or foreigners.
4. What are the 4 main accounts?
The four main accounts in accounting help organize and categorize all business transactions for accurate record-keeping. These foundational accounts are:
- Assets
- Liabilities
- Income/Revenue
- Expenses
5. What are asset accounts and why are they important?
Asset accounts represent resources owned by a business, such as cash, equipment, or inventory. These accounts reflect what the business possesses that has economic value and can contribute to future earnings. Managing asset accounts is crucial because:
- They track valuable company property.
- They help assess liquidity and financial strength.
- Accurate asset records are needed for financial reporting and auditing purposes.
6. What is the difference between a savings account and a current account?
A savings account and a current account serve different purposes in personal finance. A savings account is designed mainly for saving money and earning interest on deposits. It typically has limited transaction capabilities. In contrast, a current account (also known as a checking account) is for frequent transactions like deposits, withdrawals, and payments, often with no limit on the number of transactions. The main difference lies in the purpose and transaction frequency; savings accounts focus on growing funds, while current accounts enable daily banking activities efficiently.
7. What are liability accounts?
Liability accounts record obligations or debts that a business owes to other parties. Typical examples include loans, accounts payable, and accrued expenses. These accounts are essential because they show the company's legal responsibilities to pay back amounts in the future, impacting the business's financial health and creditworthiness. Tracking liabilities helps organizations manage cash flow, meet repayment schedules, and plan for future expenses. Recognizing and monitoring liabilities is critical for sound financial management and transparent accounting practices.
8. Why are nominal accounts important in accounting?
Nominal accounts are crucial in accounting because they capture all income, gains, expenses, and losses during a financial period. These accounts include items like sales revenue, salaries, utilities, and rent. At the end of an accounting period, the balances in nominal accounts are transferred to the profit and loss account, which helps determine the net profit or loss. By summarizing revenue and expenses, nominal accounts provide insight into business performance and guide strategic decision-making for future operations.
9. What is a personal account in accounting?
A personal account in accounting refers to records related to individuals, organizations, or firms with whom the business has financial dealings. These accounts include customers, suppliers, employees, and banks. The main function of a personal account is to track money owed to or by the business and maintain accurate balances for each party. Properly managing personal accounts ensures transparent dealings and helps resolve disputes by providing clear transaction histories for key business relationships.
10. How do equity accounts differ from asset accounts?
Equity accounts and asset accounts serve distinct roles in financial accounting. Asset accounts represent resources owned by the business, such as cash or property, while equity accounts show the owner’s residual interest after all liabilities are deducted. Equity includes components like capital contributed, retained earnings, and capital reserves.
- Asset accounts report what the business owns.
- Equity accounts reflect the owner's stake after debts.
- Both appear on the balance sheet, but under different sections.
11. Which account types are found in an income statement?
An income statement displays a company’s revenues, expenses, gains, and losses over a specific period, summarizing operational performance. The primary account types found in an income statement include:
- Income/Revenue accounts: Record sales and service income.
- Expense accounts: Track costs like wages, rent, utilities, and supplies.
- Gains/Losses accounts: Capture results from incidental transactions.
