What Are The 3 Types of Accounts in

Accounting?
Financial Accounting is based on ‘Principle of Duality’ which states that each business
transaction recorded in books of accounts has a two fold effect. In other words, each transaction
involves at least two accounts when recorded in the books of accounts.

For instance, Kapoor Pvt Ltd purchases 1,000 units of raw material worth Rs 1 Lakh for its
business. In this transaction, Kapoor Pvt Ltd receives raw material in return of cash worth Rs 1
Lakh. In other words, raw material is what comes into the business and cash worth Rs 1 Lakh
goes out of the business.

Thus, such a transaction impacts the stock of raw material, thereby increasing the same by 1,000
units. On the other hand, it also impacts cash available with the business, reducing it by Rs 1
Lakh.

This is ‘Double Entry System’ of Accounting that is typically followed when preparing books of
accounts of a business. It is based on the ‘Dual Accounting Concept’ as per which every business
transaction has an equal and opposite effect in minimum two different accounts

What is an Account?
Account is nothing but an outline of the transactions undertaken by the business in respect of
persons, their representatives and things.

For instance, when a business enters into transactions with suppliers or customers, both suppliers
and customers act as separate accounts.

Similarly, business purchasing tangible items like plant, machinery, land, building etc treats each
of the tangibles as individual accounts. Such accounts are related to things.

Thus, whenever a business undertakes transactions, it must identify the accounts involved and
then apply the requisite accounting standards and golden accounting rules to record such
transactions.

Further, an account is usually represented in a T-Format. Thus, a T Account has two sides to it.
The left side is known as the debit side whereas the right side of an account is labeled as the
credit side.

So, a T-Account is prepared in the following manner:

Plant Account
 Plant Account
Particulars (Dr) Amount Particulars (Cr) Amount

(Debit Side) (In Rupees) (Debit Side) (In Rupees)

Types of Accounts
Accounts are classified into following categories:

 Personal Account
o Natural Personal Account
o Artificial Personal Account
o Representative Personal Account
 Real Account
o Tangible Real Account
o Intangible Real Account
 Nominal Account

1. Personal Account

As the name suggests, Personal Accounts are the ones that are related with individuals,
companies, firms, group of associations etc. These persons could include natural persons,
artificial persons or representative persons.

Type of Personal Accounts

a. Natural Persons

These accounts relate to natural persons such as Veer’s A/c, Ayan’s A/c, Karen’s A/c etc.

b. Artificial Accounts

These accounts relate to companies and institutions such as Kapoor Pvt Ltd A/c, Booker’s Club
A/c etc. Thus, companies and institutions are the entities that exist in the eyes of law.

c. Representative Accounts

Accounts that are a representative of some person are called as representative accounts. These
include Outstanding Interest A/c, Outstanding Wages A/c, Prepaid Expense A/c etc.

Golden Rule Related To The Personal Account

Debit the Receiver, Credit the Giver

Illustration
Karan purchased a machinery from M/s Sharma worth Rs 10,00,000 on credit. So, this
transaction involves two accounts: a Personal Account of M/s Sharma and Machinery Account.
Thus, purchasing a machinery worth Rs 10,00,000 on credit means that M/s Sharma is providing
the Machinery to Karan for his business. The Golden Rule of Personal Account says, “Debit the
Receiver, Credit the Giver”.

Since M/s Sharma is the Giver in this transaction, his Personal Account will be credited with Rs
10,00,000. Whereas, Machinery A/c would be debited with the same amount.

Thus, this transaction will be recorded in the respective accounts as follows:

Machinery Account
Amount Amount
Particulars (Dr) Particulars (Cr)
(in Rs) (in Rs)
To M/s Sharma 10,00,000
M/s Sharma Account
Amount Amount
Particulars (Dr) Particulars (Cr)
(in Rs) (in Rs)
By Machinery 10,00,000

2. Real Account

Real Accounts are the ones that are related with properties, assets or possessions. These
properties can be both physically existing as well as non physical in nature. Thus, Real Accounts
can be of two types: Tangible Real Accounts and Intangible Real accounts.

a. Tangible Real Accounts

Tangible Real Accounts are accounts which have physical existence. In other words, such assets
can be seen, felt or touched. For example Machinery A/c, Vehicle A/c, Building A/c etc.

a. Intangible Real Accounts

These are the assets or possessions that do not have physical existence but can be measured in
terms of money. This means that such assets have some value attached to them.

For example, trademarks, patents, goodwill, copyrights etc.

Golden Rule Related To The Personal Account

Debit What Comes In, Credit What Goes Out

Illustration
Karan purchased a vehicle for his business worth Rs 5,00,000 in cash. So, this transaction
involves two real accounts: Vehicle Account and Cash Account.

Thus, purchasing a Vehicle worth Rs 5,00,000 in cash means Vehicle is coming into the
business. Whereas, Cash is going out of the business. The Golden Rule of Real Account says,
“Debit What Comes in, Credit What Goes Out”.

Both Vehicle and Cash being Real Accounts, therefore, Vehicle A/c will be debited with Rs
5,00,000. Whereas, Cash A/c will be credited with the same amount.

Thus, this transaction will be recorded in the respective accounts as follows:

Vehicle Account
Amount Amount
Particulars (Dr) Particulars (Cr)
(in Rs) (in Rs)
To Cash 5,00,000
Cash Account
Amount Amount
Particulars (Dr) Particulars (Cr)
(in Rs) (in Rs)
By Vehicle 5,00,000

3. Nominal Account

Nominal Accounts relate to income, expenses, losses or gains. These include Wages A/c, Salary
A/c, Rent A/c etc.

Golden Rule Related To The Personal Account

Debit All Expenses and Losses, Credit All Incomes and Gains

Illustration

Karan paid wages worth Rs 1,00,000 in cash. So, this transaction involves two accounts:
Nominal Account of Wages and Real Account of Cash.

Thus, paying wages worth Rs 1,00,000 in cash means wages are an expense to the business. And
Cash is paid towards such an expense. Now Golden Rules pertaining to two accounts would
apply in such a case. The Golden Rule of Nominal Account says, “Debit All Expenses and
Losses, Credit All Incomes and Gains”.Whereas, Golden Rule of Real Account says, “Debit
What Comes In, Credit What Goes Out”.

Thus, Wages A/c will be debited with Rs 1,00,000. Whereas, Cash A/c will be credited with the
same amount.
Thus, this transaction will be recorded in the respective accounts as follows:

Wages Account
Amount Amount
Particulars (Dr) Particulars (Cr)
(in Rs) (in Rs)
To Cash 1,00,000
Cash Account
Amount Amount
Particulars (Dr) Particulars (Cr)
(in Rs) (in Rs)
By Wages 1,00,000

Example
Let’s consider the transactions taken in the above examples and apply these rules to see the dual
accounts involved in every transaction.

1. Karan started a business with Rs 10,00,000.

Accounts Involved: Cash – Real Account, Karan’ Capital – Personal Account

Effect of Transaction: Cash (asset) increases by Rs 10,00,000 and Capital (liability) increases
by Rs 10,00,000.

Cash Account
Amount Amount
Particulars (Dr) Particulars (Cr)
(in Rs) (in Rs)
To Capital 10,00,000
Karan’s Capital Account
Amount Amount
Particulars (Dr) Particulars (Cr)
(in Rs) (in Rs)
By Cash 10,00,000

2. Karan deposited Rs 9,60,000 in Bank of Baroda

Bank Account
Amount Amount
Particulars (Dr) Particulars (Cr)
(in Rs) (in Rs)
To Cash 9,60,000
Accounts Involved: Cash – Real Account, Bank of Baroda – Personal Account
Effect of Transaction: Cash at Bank (asset) increases by Rs 9,60,000 and Cash (asset) decreases
by Rs 9,60,000.

Cash Account
Amount Amount
Particulars (Dr) Particulars (Cr)
(in Rs) (in Rs)
By Bank 9,60,000

3. Purchased Furniture worth Rs 6,00,000 and in return a cheque is issued on the

same day

Accounts Involved: Bank – Real Account, Furniture – Real Account

Effect of Transaction: Furniture (asset) increases by Rs 6,00,000 and the Bank (asset) decreases
by Rs 6,00,000.

Furniture Account
Amount Amount
Particulars (Dr) Particulars (Cr)
(in Rs) (in Rs)
To Bank 6,00,000
Bank Account
Amount Amount
Particulars (Dr) Particulars (Cr)
(in Rs) (in Rs)
By Furniture 6,00,000

4. Purchased Machinery for Rs 2,00,000 and an advance of Rs 30,000 is paid in

cash to M/s Singhania

Accounts Involved: Machinery – Real Account, Cash – Real Account, Singhania – Personal
Account
Effect of Transaction: Machinery (asset) increases by Rs 2,00,000, Cash (asset) decreases by Rs
30,000 and Creditors (liability) increases by Rs 1,70,000.

Machinery Account
Amount Amount
Particulars (Dr) Particulars (Cr)
(in Rs) (in Rs)
To M/s Singhania 1,70,000
 Machinery Account
To Cash 30,000
Cash Account
Amount Amount
Particulars (Dr) Particulars (Cr)
(in Rs) (in Rs)
By Machinery 30,000
Singhania Account
Amount Amount
Particulars (Dr) Particulars (Cr)
(in Rs) (in Rs)
By Machinery 1,70,000

5. Goods bought from M/s Khanna worth Rs 70,000

Accounts Involved: Stock – Real Account, M/s Khanna – Personal Account

Effect of Transaction: Goods increase by Rs 70,000 and the Creditors (liability) increases by Rs
70,000.

Stock Account
Amount Amount
Particulars (Dr) Particulars (Cr)
(in Rs) (in Rs)
To M/s Khanna 70,000
M/s Khanna Account
Amount Amount
Particulars (Dr) Particulars (Cr)
(in Rs) (in Rs)
By Stock 70,000

6. Goods worth Rs 50,000 sold to Bector Enterprises for Rs 60,000

Accounts Involved: Stock – Real Account, Bector Enterprises – Personal Account, Karan’s
Capital – Personal Account
Effect of Transaction: Debtors (asset) increased by Rs 60,000, Goods (asset) decrease by Rs
50,000 and Capital (Profit) increases by Rs 10,000.

Stock Account
Amount Amount
Particulars (Dr) Particulars (Cr)
(in Rs) (in Rs)
By Bector Enterprises 50,000
 Bector Enterprises Account
Amoun
Amount
t
Particulars (Dr) Particulars (Cr)
(in Rs)
(in Rs)
To Stock 50,000
To Capital 10,000
Capital Account
Amount Amount
Particulars (Dr) Particulars (Cr)
(in Rs) (in Rs)
By Bector Enterprises 10,000