Understanding the Three Major Types or Groups of Accounts: Real, Personal & Nominal Accounts

If you are dealing with accounts, you may be noticing different types and characteristics of accounts according to varied nature of dealings and degree of physical existence. Accounts are maintained for Building, land, machine, furniture, or in the names of persons like X, Y, Z or in the heads of various expenses and incomes like Food expenses, Tour expenses, Travelling expenses, or interest received from bank, interest paid to 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.

• According to one approach which goes directly on the meaning of the word "Real", real denotes to physical existence. So, all those accounts which represent physically existing goods or entities are known as Real Accounts. These include assets and stores accounts which we can feel and touch physically. So according to this explanation, Real accounts include assets like Land, Building, Furniture, Equipment, Roads, Tools and all physical stores items. 
• The other perception of Real Accounts interprets the word "Real" as equal to permanence in nature. This definition is based on the periodicity of the account. 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 balance sheet items of Assets, Liabilities, Capital are all grouped into Real Accounts.

Personal Accounts

Personal accounts refer to the accounts of Creditors and Debtors and the shareholders and partners, etc.

All these accounts are maintained in a certain person's name or a company name. 

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. If you are dealing with accounts, you might have noticed that most purchases and sales deal on credit basis. So there will always be balances outstanding in those accounts at the end of a particular year and need to be carried over to the next year as opening balances in their accounts.

Often, the same account can be grouped as Real and Personal also.

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 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 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.