Types of Accounts: Real, Personal & Nominal Accounts

If you are dealing with accounts, you may notice different types and characteristics of accounts, depending on the nature of the dealings and the degree of physical existence. Accounts are maintained for buildings, land, machinery, furniture, or in the names of persons like X, Y, Z, or under various expense and income heads. For example, food expenses, tour expenses, travel expenses, interest received from the bank, interest paid to the bank, salary income, or salary expenses, etc.

Based upon this varied nature and characteristics of the accounts, all accounts have been classified into three major Groups of Accounts. 

This classification is known as the traditional classification of accounts:

1. Real Accounts
2. Personal Accounts
3. Nominal Accounts

Let us examine each group deeply.

Real Accounts

There are two kinds of approaches to defining the Real Accounts:

1. Physical Existence
2. Permanence in nature

According to the first approach, which goes directly on the meaning of the word "Real", the term Real points to physical existence. So, all those accounts which represent physically existing goods or entities are known as Real Accounts. These include assets and goods, which we can physically feel and touch. 

So, Real Accounts include assets like Land, Building, Furniture, Equipment, Roads, Tools, and all physical store items. 

The second approach of Real Accounts interprets the word "Real" as equal to permanence in nature. This definition is based on the account's periodicity. So, this approach considers all Balance sheet items of a business entity as 'Real' because all balances in these Balance Sheets are carried over from one year to another year. So they are considered to be Permanent Accounts and hence grouped as "Real Accounts". So according to this interpretation, all items of Assets, Liabilities, and Capital are all grouped into Real Accounts.

Personal Accounts

Personal accounts refer to the accounts of people who are somehow related to the business. They include Creditors, Debtors, Shareholders, and partners, etc. Their accounts are maintained in their personal names or the company/firm they belong to.  

But if we adopt the definition of Real Accounts as permanently carried over accounts from one year to another year, then there will be a clash between Personal Accounts and Real Accounts. 

In business, most purchases and sales are done on a credit basis. So there will always be balances outstanding in their accounts at the end of any particular year, which are carried over to the next year as opening balances in their accounts to offset them with payments made or received.

So, it is better to consider physical items as Real accounts and Name accounts as Personal accounts.

Nominal Accounts

All expenditure accounts and income accounts which form a part of the Profit and Loss Account are grouped as Nominal Accounts. They are so called because they are maintained only during that particular year to know the impact of the transactions on the business. The profit or loss of the business is calculated with the help of these accounts. And as soon as the objective is over, all these accounts will be closed in that year itself. Only the net amount of either profit or loss is carried forward to the next year. So these accounts are not permanent in nature. They are only nominal for the time being.