"Real, Personal, and Nominal Accounts: Understanding the Three Pillars of Accounting"​ - Traditional Approach (2024)

Accounting is an essential aspect of managing a business, and accurate financial records are crucial for making informed decisions. One of the key components of accounting is the chart of accounts, which is used to organize a company's financial transactions into various accounts. These accounts are then categorized into three main types: real accounts, personal accounts, and nominal accounts.

Real Accounts:

Real accounts are also known as permanent accounts, and they are used to record the assets, liabilities, and owner's equity of a business. These accounts maintain a continuous balance over time and are not closed at the end of an accounting period. Examples of real accounts include cash, accounts receivable, inventory, land, buildings, equipment, and investments.

The rules for real accounts are:

• Debit what comes in.
• Credit what goes out.

For example, when a business acquires a new asset, such as equipment, it is recorded as a debit in the equipment account. When a business receives cash from a customer, it is recorded as a debit in the cash account. Conversely, when a business sells an asset, such as inventory, it is recorded as a credit in the inventory account. When a business pays cash to a supplier, it is recorded as a credit in the cash account.

Personal Accounts:

Personal accounts are used to record the transactions of individuals, companies, or organizations with whom a business has financial dealings. These accounts are also known as temporary accounts because they are closed at the end of an accounting period. Examples of personal accounts include accounts payable, accounts receivable, and owner's equity.

The rules for personal accounts are:

• Debit the receiver.
• Credit the giver.

For example, when a business sells goods or services on credit, it is recorded as a debit in the accounts receivable account. When a customer pays their outstanding balance, it is recorded as a credit in the accounts receivable account. Conversely, when a business purchases goods or services on credit, it is recorded as a credit in the accounts payable account. When the business pays off its outstanding balance, it is recorded as a debit in the accounts payable account.

Nominal Accounts:

Nominal accounts are used to record expenses, revenues, gains, and losses of a business. These accounts are also known as temporary accounts because they are closed at the end of an accounting period. Examples of nominal accounts include sales, rent, salaries, advertising expenses, and interest expenses.

The rules for nominal accounts are:

• Debit all expenses and losses.
• Credit all incomes and gains.

For example, when a business incurs an expense, such as rent or salaries, it is recorded as a debit in the corresponding expense account. When the business earns revenue, such as through sales, it is recorded as a credit in the corresponding revenue account. Conversely, when a business experiences a loss, such as from damaged inventory, it is recorded as a debit in the corresponding loss account. When the business gains something, such as from the sale of an asset, it is recorded as a credit in the corresponding gain account.

In conclusion, real accounts, personal accounts, and nominal accounts are essential components of accounting, and each type of account has its own set of rules. Real accounts record the assets, liabilities, and owner's equity of a business, personal accounts record the transactions of individuals and organizations, and nominal accounts record the expenses, revenues, gains, and losses of a business. Following these rules and properly recording transactions is crucial for accurate financial reporting and informed decision-making in business.