In accounting, every transaction is recorded under one of three broad categories of accounts:
- Personal Account
- Nominal Account
- Real Account
These three classifications form the foundation of accounting and help determine how transactions are recorded in the books of accounts. Let us understand each of them in detail.
1. Personal Account
A Personal Account relates to persons or entities. These may be natural persons, such as individuals, or artificial persons, such as companies, firms, institutions, and other legal bodies.
Personal accounts are broadly classified into the following types:
Natural Personal Account
A natural personal account relates to human beings. These are accounts maintained in the name of individuals.
Examples: Ravi’s Capital Account, Sneha’s Drawings Account, Shilpa’s Creditor Account, Ajay’s Debtor Account
Artificial Personal Account
An artificial personal account represents entities that are not human beings but are recognised as separate legal persons under the law.
Examples: Bank Accounts, Company Accounts, Government Bodies, Hospitals, Cooperative Societies, Partnership Firms, Associations
Representative Personal Account
A representative personal account represents a certain person or group of persons indirectly. These accounts are generally created to record amounts due or prepaid in relation to expenses and incomes.
For example, such accounts may represent:
- salary payable to employees,
- outstanding rent,
- prepaid insurance, or
- accrued income.
These accounts help capture transactions that belong to a previous period or to an upcoming period.
2. Nominal Account
A Nominal Account is used to record all expenses, losses, incomes, and gains of a business during a particular accounting period.
These accounts are temporary in nature and relate only to one financial year. At the end of the year, their balances are transferred to the Profit and Loss Account, and the accounts start afresh in the next financial year.
Nominal accounts therefore play an important role in determining the financial performance of the business.
Examples of nominal accounts: Sales Account, Purchases Account, Salary Account, Fuel Expense Account, Rent Account, Interest Received Account
A nominal account appears in the company’s Profit and Loss Account.
3. Real Account
A Real Account is a general ledger account that records transactions related to the assets and liabilities of a business.
These accounts are permanent in nature and are carried forward from one financial year to the next. Unlike nominal accounts, they are not closed at the end of the year.
Real accounts may be associated with:
Tangible Assets
These are physical assets that can be seen and touched.
Examples: Land, Building, Machinery, Furniture, Cash
Intangible Assets
These are non-physical assets that still hold value for the business.
Examples: Goodwill, Patents, Copyrights, Trademarks
Liabilities
Real accounts also include obligations of the business.
Examples: Term Loan Account, Tax Payable Account, Outstanding Liabilities
A real account appears in the company’s Balance Sheet.
Final Thoughts
Understanding the three types of accounts — Personal, Nominal, and Real — is essential for recording transactions accurately and building a strong foundation in accounting. These classifications not only help organise business transactions but also ensure that financial statements reflect the correct financial position and performance of the business.
At PN Ajmera, we believe that clarity in fundamentals leads to strength in financial management. A sound understanding of core accounting concepts is the first step toward reliable books, better compliance, and informed decision-making.
