Financial Statements are prepared at the year-end and numerous transactions recorded in various accounts throughout the period are transferred to financial statements. There are different types of accounts such as assets, liabilities, equity, incomes, gains, and losses. The accounts of incomes, expenses, gains and losses accounts are closed at the end of the accounting and this is called as nominal accounts. On the other hand, the balance in accounts of assets, liabilities, and equity are not closed at the end of the accounting period, these accounts are carried forward to the next year. This is called Real Accounts.
Types of Accounting
There is two types of accounts-
- Personal Accounts
- Impersonal Accounts
Impersonal Accounts again is two types:
- Nominal Account
- Real Account
Personal Accounts is the accounts which are related with the real person in the eye of law or in the existence. The personal accounts are individuals accounts, Firms Accounts and Companies Accounts.
Personal Accounts may be classified into three types:
- Natural Personal Accounts : The accounts which are linked with a real person is called natural personal accounts. Accounts of individual are the example of natural personal accounts. Say for Example : John A/c, Robin A/c, Saima A/c etc..
- Artificial Personal Accounts: Accounts of companies, Intuitions are the example of Artificial personal Accounts because these accounts are considered as the Artificial Juridical Persons in the eye of law. Example of Artificial Accounts are: Siams Ltd, M/s. John & Sons etc.
- Representative Personal Accounts: The accounts which are represents some person such as Wages outstanding, Prepaid Insurance, Prepaid Rent etc.
The account balance which is closed at the end of the accounting year is called “Nominal Account.” Nominal accounts begin with zero balance. As the balance doesn’t carry forward to the next accounting year, this account also called as “temporary account.” Most of the nominal account balances are recorded in the income statement i.e revenue, expenses and this balance is closed within the accounting period. There is no scope to carry forward the balances of nominal account. The final amount of income statement i.e Revenue less Expenditure is the profit of the company and transferred it to the balance sheet as accumulated profit.
The nominal accounts are:
- Incomes – Revenue/Sales
- Expenses – i.e Cost of Sales, Administrative Expenses, Distribution expenses, and Finance cost
- Gains – gains from the sale of share
- Losses – loss on disposal of assets
All kinds of Assets, Liabilities and Equity accounts are considered as ” Real Account.” The balance of real account can’t be closed at the end of the accounting year. Real accounts have the opening balance which is brought forward from the previous year. This account is deemed as “permanent account.” Accounts Receivable, Accounts Payables, Equity of the shareholders, Loan from the bank are the example of a real account.
Difference between Nominal Accounts & Real Accounts
- The balance of nominal accounts are closed at the end of the financial year
- Incomes, Expenses, gains, and losses accounts are classified as nominal accounts.
- Nominal accounts are exhibited in the income statement.
- The real account balance is not closed at the end of the financial year
- Assets, Liabilities, and Equities are classified as real accounts
- These account balances are exhibited on the balance sheet
Rules for Debit and Credit
|Types of Accounts||Rules for Debit||Rules for Credit|
|a) Personal Account||Debit the receiver||Credit the giver|
|b) Real Account||Debit what comes in||Credit what goes out|
|c) Nominal Account||Debit all expenses and losses||Credit all incomes and Gains|
Illustration of Personal, Nominal & Real A/c
From the below mentioned items, fund the Personal Account, Nominal Account and Real Account:
- Freehold Property
- Investment in Shares
- Accrued Interest
- Shaan Agro Industries Limited
- SS Steel Limited
- Salary Accounts
- Dividend Received Account
- Purchase Account
- Cost of Goods Sold
- Sales Account
|Item Name||Account Name||Explanation|
|1. Freehold Property||Real Account||Asset of the company and will not close in the income year|
|2. Investment in Shares||Real Account||As above|
|3. Accrued Interest||Personal Account||Representative Personal Account (Represent to some one)|
|4. Shaan Agro Industries||Personal Account||Artificial Personal Account|
|5. SS Steel Limited||Personal Account||As above|
|6. Salary Accounts||Nominal Account||Expenses of the company|
|7. Dividend Received Account||Nominal Account||Income of the Company|
|8. Purchase Account||Real Account||Because goods purchased are the part of Closing Stock|
|9. Cost of Goods Sold||Nominal Account||Expenses against the revenue|
|10. Sales Account||Nominal Account||Income of the company|
Nominal accounts are the revenue account in nature while Real accounts are Capital account. Nominal accounts are closed at the end of the accounting period because its balances are adjustable with the sales revenue or the income of the account. On the other hand, the Real account cannot be closed at the year-end because its balance cannot be adjusted with sales revenue and its require further treatment. i.e Accounts receivable accounts cannot be closed until the all due are collected.