Types of Accounts: Personal, Real and Nominal

By Ejaj Abubakar Rangunwala
M.Com., B.Ed., D.B.M.

This is the first classification step in the Accounting Logic System™. Before applying any Debit or Credit rule, first identify the accounts affected by a transaction and then classify each account correctly.

Learning objective: By the end of this lesson, you should be able to distinguish Personal, Real and Nominal Accounts, understand the difference between properties and receivables, classify Goods Accounts correctly within this learning system, and test your understanding with practical examples.

Why Account Classification Comes First

Every business transaction affects at least two accounts. It does not mean that one account is written twice. It means that two or more separate accounts change because of the transaction. Classification helps us understand the nature of each affected account before we decide its Debit or Credit treatment.

Use this simple sequence:

  1. Read the transaction carefully.
  2. Identify every affected account.
  3. Classify each account as Personal, Real or Nominal.
  4. Only after classification, continue to Debit and Credit logic.

This lesson covers classification only. The rules are deliberately kept for the later lesson so that the learning sequence remains clear.

1. Personal Accounts

Personal Accounts represent persons, organisations and accounts that stand for a person or group of persons. A person can be a human being, a firm, a company, a bank, an institution or another party with whom the business has a financial relationship.

Three Useful Groups of Personal Accounts

Group Meaning Examples
Natural persons Individual human beings Rohan Account, Meena Account, Proprietor Account
Artificial persons Organisations recognised separately from individuals Bank Account, Supplier Company Account, College Account
Representative personal accounts Accounts that represent a person or group to whom an amount is receivable or payable Outstanding Salary, Prepaid Insurance, Bills Receivable, Bills Payable

Receivables Are Personal Accounts

A receivable is an amount that another person or organisation has to pay to the business. Debtors, Bills Receivable and similar receivables are therefore Personal Accounts. They are assets, but they are not business properties. They represent amounts receivable from persons.

2. Real Accounts

Real Accounts represent properties owned or controlled by the business. A property has economic value and helps the business operate or earn income.

Tangible and Intangible Properties

Type Meaning Examples
Tangible property Property that has a physical form Cash, Furniture, Machinery, Building, Computer, Motor Vehicle
Intangible property Property without physical form but with economic value Goodwill, Patent, Copyright, Trademark, Computer Software

Cash is a Real Account because money is a business property. A bank account, however, is treated as a Personal Account because the bank is an artificial person and the balance represents the bank’s obligation to the business.

Goods Accounts in Accounting Logic System™

Goods purchased for resale are business property. Therefore, accounts that represent the movement or value of trading goods are treated as Real Accounts in this learning system. These include:

  • Purchases Account
  • Sales Account
  • Purchase Returns Account
  • Sales Returns Account
  • Opening Stock and Closing Stock
  • Goods Withdrawn by the proprietor
  • Goods given as samples or charity
  • Goods destroyed, damaged or lost

This classification helps students follow the physical and economic movement of goods instead of memorising disconnected labels.

3. Nominal Accounts

Nominal Accounts represent expenses, losses, incomes and gains of a particular accounting period. Unlike Real Accounts, they do not represent business property. Unlike Personal Accounts, they do not represent a person or an amount receivable from or payable to a person.

Category Meaning Examples
Expenses Costs incurred to operate the business Salary, Rent, Electricity, Advertising, Carriage
Losses Reductions in benefit without an equivalent operating return Loss on Sale of Machinery, Bad Debts, Loss by Accident
Incomes Amounts earned through business or other activities Commission Received, Interest Received, Rent Received
Gains Benefits arising outside normal operating expenses Profit on Sale of Asset, Appreciation Gain where recognised

Properties and Receivables: The Important Difference

Assets consist broadly of properties and receivables. This distinction prevents a common beginner mistake.

  • Properties are Real Accounts: Cash, Furniture, Machinery, Building and Stock.
  • Receivables are Personal Accounts: Debtors, Bills Receivable, Accrued Income and other amounts receivable from persons.

Both may appear as assets in the Balance Sheet, but their account classification is different.

Worked Classification Examples

Account Type Reason
Cash Account Real Cash is money and therefore business property.
Bank Account Personal A bank is an artificial person.
Furniture Account Real Furniture is tangible business property.
Goodwill Account Real Goodwill is intangible property.
Riya, a customer Personal Riya is a natural person and may owe money to the business.
Outstanding Salary Personal It represents salary payable to employees.
Bills Receivable Personal It represents an amount receivable from a person.
Purchases Account Real It represents trading goods coming into the business.
Sales Account Real It represents trading goods moving out of the business.
Salary Account Nominal Salary is a business expense.
Commission Received Nominal Commission received is income.
Loss on Sale of Machinery Nominal It represents a loss for the accounting period.

Worked Transaction — One Purchase, Three Different Account Types

A business buys Furniture for ₹30,000. It pays ₹10,000 in Cash immediately and agrees to pay the remaining ₹20,000 to Mira Furnishers later. Before deciding Debit and Credit, identify and classify all three affected accounts.

Affected account Change caused by the transaction Classification Reason
Furniture A/c Business property increases by ₹30,000 Real Account Furniture is tangible business property.
Cash A/c Business property decreases by ₹10,000 Real Account Cash is money held as business property.
Mira Furnishers A/c Amount payable increases by ₹20,000 Personal Account The supplier is a person or organisation to whom the business owes money.
Independent control check: Furniture increases by ₹30,000, Cash decreases by ₹10,000 and the supplier liability increases by ₹20,000. Therefore, net assets increase by ₹20,000 and liabilities also increase by ₹20,000. The accounting equation remains balanced.

This example shows why account names must be identified separately: a single transaction can affect two Real Accounts and one Personal Account. After classification, continue to the Debit and Credit lesson and see the complete recording method in Journal Entries Step by Step.

Quick Classification Test

Ask these questions in order:

  1. Does the account represent a person, organisation, receivable or payable? If yes, it is Personal.
  2. Does it represent business property, including trading goods? If yes, it is Real.
  3. Does it represent an expense, loss, income or gain? If yes, it is Nominal.

Practice Exercise

Classify each account as Personal, Real or Nominal before checking the answers.

  1. Debtors Account
  2. Machinery Account
  3. Rent Paid Account
  4. State Bank of India Account
  5. Closing Stock Account
  6. Interest Received Account
  7. Copyright Account
  8. Outstanding Rent Account
  9. Sales Returns Account
  10. Bad Debts Account
  11. Computer Software Account
  12. Bills Payable Account

Answer Key

1 Personal; 2 Real; 3 Nominal; 4 Personal; 5 Real; 6 Nominal; 7 Real; 8 Personal; 9 Real; 10 Nominal; 11 Real; 12 Personal.

Common Beginner Mistakes

  • Calling every asset a Real Account without separating properties from receivables.
  • Calling Bank Account a Real Account merely because cash is deposited there.
  • Treating a payable expense and the expense itself as the same account. For example, Salary Account is Nominal, while Outstanding Salary is Personal.
  • Applying Debit and Credit rules before identifying all affected accounts.
  • Forgetting that every transaction affects at least two separate accounts.

Remember the Sequence

Identify the affected accounts → Classify each account → Understand Debit and Credit → Apply the relevant rule → Record the Journal entry.

Frequently Asked Questions

Is Bills Receivable a Personal, Real or Nominal Account?

In the traditional Personal–Real–Nominal classification used in Accounting Logic System™, Bills Receivable is a Personal Account. It represents an amount receivable from the party that owes the business money, so it is a representative Personal Account. Although Bills Receivable appears as an asset in the Balance Sheet, its classification here is Personal rather than Real or Nominal. Do not confuse Bills Receivable with the physical paper or electronic record of the bill; classify the amount due from the party.

What are the three types of Personal Accounts?

Personal Accounts are commonly grouped into Natural Personal Accounts (individuals such as customers and suppliers), Artificial Personal Accounts (organisations such as banks and companies), and Representative Personal Accounts (amounts receivable from or payable to persons, such as Bills Receivable and Outstanding Salary). See the examples in the table above.

Is every asset a Real Account?

No. In this system, business properties such as cash, stock and machinery are Real Accounts, while receivables such as debtors and Bills Receivable are Personal Accounts because they represent amounts due from persons.

Why is Cash a Real Account but Bank a Personal Account?

Cash is money held as business property. A bank balance represents the bank’s obligation to the business, and the bank is an artificial person.

Is Outstanding Salary the same type as Salary?

No. Salary Account is a Nominal Account because it records an expense. Outstanding Salary is a representative Personal Account because it represents an amount payable to employees.

How are Purchases and Sales classified here?

ACCOUNTING LOGIC SYSTEM™ treats Purchases, Sales and related goods accounts as Real Accounts because they represent the movement or value of goods held for resale. Students should retain this terminology when following the book’s modified rules.

Next Lesson: Debit and Credit Explained Through Logic →

You can then continue to How to Identify Business Transactions and the complete Accounting Logic System™ learning path.

Author
Ejaj Abubakar Rangunwala
M.Com., B.Ed., D.B.M.

Rangunwala Academy