Lets start our discussion with an example. Suppose you start a new business by investing money in the business. You purchased land, furniture, raw material etc. You opened a bank account. You made some credit purchases form a vendor named Mohit. You sold the goods to a cusomer named Rahul. You also paid salaries to the staff and incurred many other expenses. Apart from the sales revenue you also received some non operating incomes like rent and interest. Now how would you record the transactions in the books. The first question that would come in you mind is ” Under what name i have to record this transaction?” Now this name which you are going to assign to different constituents of you transaction is the name of the account. An account is the summary of transactions that took place under a particular head during a time period. For example, you paid salaries to your staff. The two accounts involved in the transaction are, Salaries account and Cash account. Theses accounts would appear in the Ledger(the book which contains all the accounts of the business).
We enter into a number of transactions in the course of our business. We keep a record of all the transactions of financial nature. These transactions are recorded in the books under a unique account. Each account is assigned a separate name to distinguish it from other accounts. While making an entry in the books, first we should see, to which category of accounts it belongs. There are mainly three types of accounts.
1. Real Accounts.
2. Personal Accounts.
3. Nominal Accounts.
This classification is based on the nature of accounts i.e. asset, liability, legal entity,expenses, incomes etc.
1. Real Accounts
Accounts related to assets (tangible or intangible) come under the category of real accounts e.g. land, furniture, machinery, goodwill, patents etc are real accounts.Some of the assets of the business are such which you can touch, see and feel e.g. Land, machinery, furniture are such assets which can be seen, touched and felt. These assets are called tangible assets. Tangible assets have physical existence. Some of the examples of tangible assets are cash,inventories, debtors,securities, land, building, machinery, furniture, equipments, vehicles etc.
In business its not necessary that all assets must have a physical existence. Some assets are such which can not be touched, seen or felt but still they have an economic value. The example of such assets are Goodwill, patents, trademarks, brand value, human intelligence. These assets are called intangible assets. These assets just like tangible assets can be sold and bought in the market and these appear on the balance sheet of the company together with other assets.
2. Personal Accounts.
Accounts related to persons (living ar non living) are called personal accounts. In business we have to deal with a number of persons. Some are living like us and some are artificial which do not have a living existence but have a separate legal existence.Thus in accountancy we classify persons into Natural Persons and Artificial Person.
Natural persons are the persons who are living e.g. Rahul, Mohit, Sam, Peter etc.
Artificial persons are all the firms, companies, institutions with whom you deal. In accounts business is a separate legal entity which has an existence of its own . Simailarly the other companies, firm or organisations are regarded as separate legal entities.These are regarded as artificial persons. When we enter into any transaction with these artificial entities, we record the transaction under the name of that company, firm or organisation. Examples of artificial persons are ABC Ltd, Wipro Ltd, Hindustan Lever, X and Co, Ahuja & sons etc.
3. Nominal Accounts
These are the accounts related to incomes and expenditures of a business entity. Expenditure or expenses are the amount paid or payable which has given its benefit to the business in the fiscal year.e.g. salaries, wages, carriage, transportation, rent, electricity, stationary, taxes, commisions paid, interest paid etc.
Incomes are the receipts which increase the profits of the business. Examples of incomes are rent received, commission received, interest received,dividend received etc.