To manage transactions in business, a separate account is prepared for each type of transaction in which only the transactions related to it are recorded. In accounting, rules apply to all accounts according to their nature, that is why when accounts are prepared, they are classified into different types so that transactions can be recorded in them correctly.
Classification of accounts can be done in many ways but according to the rule of debit and credit, accounts are classified into traditional approach and modern approach. In the traditional approach, accounts are classified into three parts, and in the modern approach, accounts are classified into five parts, but the result is the same in both methods.
Table of Contents
Classification of Accounts
Following are the classification of accounts:
| Traditional Approach | – Personal Account – Real Account – Nominal Account |
| Modern Approach | – Asset Account – Capital Account – Expense Account – Liability Account – Revenue Account |
Traditional Approach
According to the traditional approach, accounts are classified into the following parts:
1. Personal Account:
It includes all the accounts that belong to a person and this person can be living or non-living. For example, living persons include humans and non-living persons include companies, etc. Note that representative accounts like outstanding expenses, prepaid expenses, etc. also come under this.
The following is an example of personal account:
- Debtor Account
- Creditor Account
- Bank Account
- Capital Account
- Drawing Account, etc.
2. Real Account:
It includes all asset accounts. Just like the way assets are classified, these accounts can also be classified into fixed and current, tangible and intangible, operating and non-operating, etc.
The following is an example of real account:
- Cash Account
- Bank Account
- Property Account
- Furniture Account
- Machinery Account, etc.
3. Nominal Account:
It includes all the accounts related to profit, loss, income, expenses, etc. In simple words, it includes all the accounts except personal accounts and real accounts. Since it is a temporary account, its balance is cleared every year.
Following is an example of nominal account:
Modern Approach
According to the modern approach, accounts are classified into the following parts:
1. Asset Account:
It includes all asset accounts. In the traditional approach, it comes under the real account and personal account, and these are permanent accounts hence they exist until the balance is cleared.
The following is an example of asset account:
- Cash Account
- Bank Account
- Debtor Account
- Property Account
- Furniture Account
- Equipment Account
- Machinery Account, etc.
2. Capital Account:
It includes all the accounts that belong to the business owner. In the traditional approach, it comes under personal account. Note that in different business forms, the owner’s investment may be known by different names, like in sole proprietorship it is known as capital, and in company it is known as shares or equity, etc.
The following is an example of capital account:
- Capital Account
- Drawing Account, etc.
3. Expense Account:
All expense accounts come under this. In traditional approach, it comes under real account and if any expense is outstanding or prepaid then it comes under personal account. Note that all the accounts under this are temporary and cleared within a year.
The following is an example of expense account:
- Purchase Account
- Freight Charges Account
- Interest Payment Account
- Rent Account
- Electricity Account
- Salary Account
- Wages Account
- Office Expenses Account, etc.
4. Liability Account:
it includes those accounts that have not been paid by the business and it is a liability or obligation of the business. In the traditional approach, this comes under personal account. Note that accounts related to expenses are not included in this, but if they are yet to be paid, they will be included.
The following is an example of liability account:
- Creditors Account
- Rent Outstanding Account
- Salary Outstanding Account
- Loan Account, etc.
5. Revenue Account:
Income, gain, profit, etc. all accounts come under this. In the traditional approach, it comes under nominal account. In simple language, all those accounts which are related to income come under this.
The following is an example of revenue account:
- Sales Account
- Interest Received Account
- Commission Received Account
- Dividend Received Account
- Rent Received Account
- Royalty Received Account, etc.
Read Also:
QNA/FAQ
Q1. The representative account comes under which account?
Ans: Personal Account
Q2. Which rule applies to outstanding expenses?
Ans: Personal account rule
Q3. Is the outstanding expense a liability?
Ans: Yes, outstanding expense is a liability.
Q4. According to the traditional approach, in how many parts accounts are classified.
Ans: According to the traditional approach, accounts are classified into three parts:
1. Personal Account
2. Real Account
3. Nominal Account
Q5. According to the modern approach, in how many parts accounts are classified.
Ans: According to the modern approach, the account is classified into five parts:
1. Asset Account
2. Capital Account
3. Expense Account
4. Liability Account
5. Revenue Account
