Billions of transactions are conducted globally each day. Even on an individual level, you participate in it regularly. Accounts are nothing but the record of these transactions. Whether you are a consumer or service provider, learning about basic accounts gives you a competitive edge. From the business perspective, you can record financial information using accounts. This helps you to track the performance of the company and make important business decisions. In fact, it is crucial in ensuring statutory compliance. And from the consumer’s perspective, you can plan your finances. You can keep track of your transactions to check your income and expenses on a regular basis. It allows you to avoid overspending and eliminate unnecessary expenses if required.
Accounts are more than just debit and credit concepts. Surely, the amount that goes is debited and the amount that comes is credited to the account. But it is more about maintaining records of all dealings. A business has many accounts namely cash accounts, assets, liabilities, income accounts, expense accounts, equity, accounts payable, accounts receivable, and many more. It is essential to understand these different types of accounts to avoid recording incorrect entries. So in this discussion, let’s take a look at each of these types in detail.
Broadly speaking, Accounts are classified into two types: Personal Account and Impersonal Account. And there are two subtypes in Impersonal Account: Real Account and Nominal Account.
1. Personal Account
The personal account is related to individuals and firms. The account that gives the benefits is the one that gets credited, whereas the account that receives the benefits is the one that gets debited. Let’s understand this with an example.
Sentence: Person A sold the goods to Person B.
In this example, since Person A is giving the benefit, his account is credited. Person B is receiving the benefits, so his account is debited.
The personal account is further divided into three subtypes: Natural Account, Artificial Account, and Representative Account.
Natural personal account
As the name suggests, natural personal accounts are related to human beings. Here, the transactions with individuals are recorded. These individuals can be either male or female. A few examples of natural personal accounts are Ana’s account, Ben’s account, and Caleb’s account.
Artificial personal account
In the artificial personal account, the financial transactions are recorded with artificial entities. These can be created by the law. Even though they are not real human beings, they are seen as ones capable of getting into agreements. A few examples of artificial personal accounts are educational institutions’ accounts, partnership firms’ accounts, and cooperative society’s accounts.
Representative personal account
The individual or group of people is represented in the representative personal account. The reason these persons are grouped is that they are of similar nature. It further simplifies the accounting process. A few examples of representative personal accounts are unearned brokerage accounts, outstanding salary accounts, and rent accounts.
2. Impersonal Account
The impersonal account does not bear the name of the person, and it is divided into two types, Real Account, and Nominal Account. In real accounts, the balances are carried forward to the next accounting year, as they are permanent accounts. While the nominal accounts don’t have balances to carry forward as they are temporary accounts.
3. Real Account
The real account is related to all the assets and liabilities of the company. The account that sells the assets is the one that gets credited, whereas the account that receives the assets is the one that gets debited. Let’s take the help of an example.
Statement: Goods 1 sold for INR 1000, and Goods 2 purchased for INR 500.
In this example, since Goods 1 is the asset that goes out, the account is credited. The Goods 2 is the asset that comes in, so the account is debited.
Real Account is further divided into two subtypes: Tangible and Intangible
Tangible real account
The properties and assets that have a physical existence and can be touched, felt, or measured are represented in tangible real accounts. A few examples of tangible real accounts are cash accounts, furniture accounts, and machinery accounts. These assets can be sold as well as purchased.
Intangible real account
The companies have different assets, but not all of them have a physical existence. Such assets that cannot be touched or felt are known as intangible assets, and they are represented in intangible real accounts. No physical existence shouldn’t be mistaken for no value, as these assets are equally important and measured in terms of money. A few examples of this type of accounts are patents, trademarks, and copyrights.
4. Nominal Account
The nominal account is related to revenue, income, gain, expense, and loss. The account that earns is the one that gets credited, whereas the account that incurs expenses or suffers losses is the one that gets debited. To understand this, let’s take an example.
Revenue, Income and Gain
Statement: Company A received a commission for an ABC project.
In this example, since Company A is receiving a commission, which is a source of income, so the commission account is credited.
Expense and loss
Statement: Company B paid rent of INR 50,000
In this example, since Company B is paying the rent, which is an expense, so the rent account is debited.
If you are starting out with accounts, these different types may seem a lot at first. But eventually, you’ll realize that using these different types will actually help you to identify your income sources. Furthermore, it helps you to distinguish non-taxable income from taxable ones. A business involves many stakeholders, from suppliers to consumers. The nature of transactions with each of these stakeholders is unique, hence it requires different types of accounts to record. Additionally, when the account is in place, there is more transparency. The shareholders of the company expect businesses to share accurate financial data with them. Showing them the accounts is a part of taking accountability. To sum up, accounting records help us to observe the growth of the firm practically and look for ways to expand the business.