It is necessary to know the classification of accounts and their treatment in double entry system of accounts. Broadly, the accounts are classified into three categories:
Let us go through them each of them one by one.
Personal accounts may be further classified into three categories:
An account related to any individual like David, George, Ram, or Shyam is called as a Natural Personal Account.
An account related to any artificial person like M/s ABC Ltd, M/s General Trading, M/s Reliance Industries, etc., is called as an Artificial Personal Account.
Representative personal account represents a group of account. If there are a number of accounts of similar nature, it is better to group them like salary payable account, rent payable account, insurance prepaid account, interest receivable account, capital account and drawing account, etc.
Every Business has some assets and every asset has an account. Thus, asset account is called a real account. There are two type of assets:
Tangible assets are touchable assets such as plant, machinery, furniture, stock, cash, etc.
Intangible assets are non-touchable assets such as goodwill, patent, copyrights, etc.
Accounting treatment for both type of assets is same.
Since this account does not represent any tangible asset, it is called nominal or fictitious account. All kinds of expense account, loss account, gain account or income accounts come under the category of nominal account. For example, rent account, salary account, electricity expenses account, interest income account, etc.