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Classification of Accounts According to the Traditional Approach

Prior to understanding the rules for traditional approach it is important to understand the various terms which will help in understanding the concepts better. 


  • Personal accounts - Personal account relates to a person, who could be a debtor or a creditor.
    • Natural personal account relates to transactions with human beings like Ram, Sita, etc.
    • Artificial personal accounts relates to artificial persons created by law and includes companies, co-operative societies, etc.
    • Representative personal accounts are those accounts which are not in the name of any person or organisation, but indirectly represent obligation towards individual or group of people. Example: Capital account, Outstanding expenses account, Prepaid account, Bank account etc.
  • Impersonal Accounts
    • Impersonal accounts are accounts which are not personal accounts. They are classified as Real account and Nominal account
    • Real accounts are those accounts which relate to the tangible or intangible real assets. Real accounts can be classified into two types: Tangible real account and Intangible real account
  1. Tangible real account includes such things that can be measured, touched, felt etc. Example: Land account, Building account, Furniture account, etc.
  2. Intangible real account includes accounts that cannot be touched, but can be valued in economic terms.

Example: Goodwill account, Patents account, etc

  • Nominal accounts are the accounts that relate to expenses, losses, gains, and profits. Nominal accounts are temporary accounts as the total of the same is transferred to the Profit and Loss account.

Example: Salary account, Discount account, Sales account, etc


Note: If any word (suffix or prefix) is added to a nominal account, it becomes a personal account. 


Example: Interest account is a nominal account but with a suffix of prepaid it becomes interest prepaid account which is representative personal account. Similarly commission receivable account, outstanding salary account etc.


Important Points:

  • At the end of a year, nominal accounts are closed by transferring the balance to Profit and Loss account.
  • Real accounts and personal accounts are not closed, but are balanced and appear in the Balance Sheet.
  • Current Assets – Current Liabilities = Working Capital, which is the amount of funds required by a business to meet its short-term obligations.
  • Goods used as free samples, for charity or for personal use by owners etc. (other than sales), purchase account is credited

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