What are the Different Types of Accounting in a Business?

Types of Accounting; The entity concept separates the concerns of the owners from the business. An extension of the same concept is the concept of accounts which splits up the business’s affairs further. The accounting concept becomes clearer once the double entry system of accounting is explaining. That is done at a later stage in the tutorial, mainly three types of accounts in accounting; Real, Personal and Nominal Accounts. Also learn, “The Language of Business” also called Accounting, but Why? the Different Types of Accounting!

Learn, Here are Explain the Different Types of Accounting in a Business!

There are several types of accounting that range from auditing to the preparation of tax returns.

Transactions within the Firm!

The firm conducts transactions with outside parties and the accounting system is capable of keeping a track of the same. However, there are many transactions that are internal to the firm.

For instance, when a company undertakes production, it converts raw material into finished products. This transaction is internal to the firm but has a material effect. If the firm were considered as one unit, it would impossible to account for the transaction as the same party cannot be on both sides of the transaction.

Entity Split Up into Accounts!

An appropriate analogy to draw would be that of the human body. The business is the complete entity i.e. the body. Accounts, on the other hand, are like lungs, kidneys, heart, etc. They are like the vital organs that are constituent parts of the entity. They have their own independent existence. However, it is the relationship between these accounts that is of prime importance. That is why it is called the accounting system.

#What are the Three Types of Accounts? Real, Personal and Nominal Accounts. There are mainly three types of accounts in accounting: Real, Personal and Nominal accounts, personal accounts are classified into three subcategories: Artificial, Natural, and Representative. If you fail to identify an account correctly as either a real, personal or nominal, in most cases, you will get the journal entries incorrect.

#Types of Accounts!

All accounts within the organization can split into three types. An account can be of one and only one of the following type and not more. Here are the various types of accounts.

#Personal Accounts

Personal accounts make the most intuitive sense. We keep a track of all the transactions that we have undertaken with a particular person in them. We all maintain personal accounts like the money we owe our friends, the grocer and so on.

These accounts are related to individuals, firms, companies, etc. A few examples of personal accounts include debtors, creditors, banks, outstanding/prepaid accounts, accounts of credit customers, accounts of goods suppliers, capital, drawings, etc.

Natural personal accounts: This type of personal accounts is the simplest to understand out of all and includes all God’s creations who have the ability to deal, who, in most cases, are people. E.g. Kumar’s A/C, Adam’s A/C, etc.

Artificial personal accounts: Personal accounts which are created artificially by law, such as corporate bodies and institutions, are called Artificial personal accounts. E.g. Pvt Ltd companies, LLCs, LLPs, clubs, schools, etc.

Representative personal accounts: Accounts which represent a certain person or a group directly or indirectly. E.g. Let’s say that wages are paid in advance to an employee – a wage prepaid account will open in the books of accounts. This wages prepaid account is a representative personal account indirectly link to the person.

For Example, The transaction below demonstrates the interaction between two different personal accounts, one of which is a private limited company and the other one is a bank.

Accounting rule for personal accounts

• Debit the receiver.
• Credit the giver.

#Real Accounts

Real accounts are accounts which have to create to account for tangible things. Accounts such as land and building, machinery a/c, etc are called real accounts. Although they are not living beings, we still transact with such entities. Records of such transactions are kept in real accounts.

All assets of a firm, which are tangible or intangible, fall under the category “Real Accounts”.

Tangible real accounts are related to things that can touch and felt physical. Few examples of tangible real accounts are building, machinery, stock, land, etc.

Intangible real accounts are related to things that can’t touch and felt physical. Few examples of such real accounts are goodwill, patents, trademarks, etc.

For Example, The transaction below shows the interaction of two different real accounts: one is furniture and the other is cash, both of them are assets of the company and hence classified as real accounts.

Accounting rule for real accounts

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

#Nominal Accounts

Nominal accounts are a special category of accounts. While the other accounts can hold the balance and carry it forward, the nominal account is automatically reset to zero as soon as the time period is over. Their balance is carried forward to other accounts and the books for that period are close. Examples of such accounts are Profit a/c, depreciation a/c, etc.

Accounts which are related to expenses, losses, incomes or gains are called Nominal accounts. The dictionary meaning of the word “nominal” is “existing in name only” and the meaning remains absolutely true in accounting sense too, because nominal accounts do not really exist in physical form, but behind every nominal account money is involving. E.g. Purchase A/C, Salary A/C, Sales A/C, Commission received A/C, etc.

The final result of all nominal accounts is either profit or loss which is then transferred to the capital account.

For Example, The following example shows a transaction where a nominal account deals with a real a/c.

Accounting rule for nominal accounts.

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

Reference

1. Types of Accounts – //www.managementstudyguide.com/types-of-accounts-in-business.htm
2. Three types – //www.accountingcapital.com/books-and-accounts/three-type-of-accounts-in-accounting/
3. Photo Credit URL – financesonline.com