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4622_Classification of Accounts

Accounting is the process of identifying, measuring, and communicating financial activities to decision-makers. Accounts are classified into personal accounts, which relate to individuals or organizations, and impersonal accounts, which include real accounts that carry balances forward and nominal accounts that are reset each period. Real accounts are listed on the balance sheet, while nominal accounts are used for income statements.

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21 views1 page

4622_Classification of Accounts

Accounting is the process of identifying, measuring, and communicating financial activities to decision-makers. Accounts are classified into personal accounts, which relate to individuals or organizations, and impersonal accounts, which include real accounts that carry balances forward and nominal accounts that are reset each period. Real accounts are listed on the balance sheet, while nominal accounts are used for income statements.

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palmer okiemute
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Meaning of Accounting

Accounting is a process of identifying and measuring quantitative financial activities and


communicates these financial reports to the decision-makers.

According to the traditional approach, accounts are classified into three types: real accounts,
nominal accounts, and personal accounts. Given that it is an old system for classifying
accounts, it is used rarely in practice.

Personal Accounts

Personal accounts are the accounts that are used to record transactions relating to individual
persons, firms, companies, or other organizations.

Examples of such accounts include an individual’s accounts (e.g., Mr. X’s account), the
accounts held by modern enterprises, and city bank accounts.

Impersonal Accounts

Impersonal accounts are those that do not relate to persons. There are two types:

1. Real accounts (or permanent accounts)


2. Nominal accounts (or temporary accounts)

Real Accounts

Real accounts exist even after the end of accounting period. For the next accounting period,
these accounts start with a non-zero balance, which is carried forward from the previous
accounting period.

Examples of such accounts include machinery accounts, land accounts, furniture accounts,
cash accounts, and accounts payable accounts.

Usually, real accounts are listed in the balance sheet of the business. For this reason, they are
sometimes referred to as balance sheet accounts.

Nominal Accounts

Nominal accounts are closed at the end of the accounting period. For the next account period,
these accounts start with a zero balance. Nominal accounts typically cover issues such as
income, gains, expenses, and losses.

Normally, nominal accounts are used to accumulate income and expense data. In turn, these
data can be used to prepare income statements or trading and profit and loss accounts. For
this reason, nominal accounts are sometimes referred to as income statement accounts.

Examples of nominal accounts include sales, purchases, gains on asset sales, wages paid, and
rent paid.

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