Account is the basic recording unit for increase or decrease in assets, liabilities, income or expense. We have different types of accounts depending on the way we treat debits and credit entries. In the banking context, account refers to an arrangement between an individual or a business with a financial institution to hold the customers assets at his/ her discretion. They are common in managerial accounts.
The figure below is an illustration of types of accounts from business transaction perspective.
Types of Accounts
From our illustration above, there are two main classes of accounts:
Refers to a class of account where the business handles real individuals, company or a business entity. Personal accounts has a tittle which is the actual name of the person or business enterprise. The usual relationship between a business and personal account is that of creditor – debtor or customer-supplier. Examples of personal account include debtors, creditors, customers, suppliers and banks. Personal accounts falls into further classification:
- Natural personal account– This is the simplest form of personal account and includes a real human being. For example John Account.
- Artificial personal account – Represents a class of artificial accounts created under the law. Examples include companies and institutions with separate legal existence from the owners.
- Representative personal account – We create this account to represent real person. Example includes wages prepaid account.
The impersonal accounts on the other hand are those accounts which will not bear the names of a person or business entity. We use these accounts to record transactions relating to property, income or expenses. Impersonal accounts have further classification; real and nominal account.
We will use a real account to record all tangibles and intangibles belonging to the business. For tangible real account items, you can touch them, feel and see them for example land, inventory and furniture. Intangible real account are business valuable that you cannot touch, see or feel. Examples include goodwill, patent and trademarks.
In the course of business activities, it has to incur expenses in order to earn revenue or undergo a form of capital restructuring. Nominal account handles transactions related to capital, revenue and expenses. Nominal accounts only exist in name and examples include salary account, sales account and commission received account among many others. The balancing figure of a nominal account is either an income or expense and is transferable to capital account.
Below is a summary of rules of Debit or Credit on different types of accounts
- Personal accounts – debit an increase/ receiver and credit a decrease/ giver.
- Real accounts – debit any receipts or what comes in and credit what goes out.
- Nominal accounts – debit any or increase in loss and expense and credit any income and gains.
All accounts discussed above have a ‘T- format’ with two sides’ i.e debit on the left and credit on the right. According to the double entry rule every business transaction affects two accounts; one account is for credits while the other is debits. The ‘T format’ will look like;