Classification of Accounts — Traditional (British) Approach

Before a transaction can be recorded, every account it affects must first be classified — this tells us which rule of debit and credit to apply to it. MSBSHSE's Book-Keeping and Accountancy syllabus, like commerce education across India, teaches two ways of classifying accounts: the older Traditional (British) Approach and the newer Modern (American) Approach. This section covers the Traditional Approach; the Modern Approach follows later in this chapter.

Under the Traditional Approach, every account is placed into one of three categories.

Personal accounts are further divided into three kinds:

• Natural Personal Accounts — accounts of human beings, e.g. Ram's A/c, Suresh's A/c.
• Artificial (Legal) Personal Accounts — accounts of a body recognised by law as a person, though not a human being, e.g. a firm's A/c, a company's A/c, a bank's A/c, a club's A/c.
• Representative Personal Accounts — accounts that represent a group of persons, or a particular person, even though the account is not named after that person directly, e.g. Outstanding Salary A/c (represents the employees to whom salary is still owed), Prepaid Insurance A/c (represents the insurer to the extent of the unexpired benefit), Capital A/c (represents the proprietor).

Real accounts are of two kinds:

• Tangible Real Accounts — assets that have a physical existence and can be touched, seen and felt, e.g. Cash A/c, Building A/c, Machinery A/c, Furniture A/c, Stock A/c.
• Intangible Real Accounts — assets that exist and have value, but cannot be touched, e.g. Goodwill A/c, Patents A/c, Trademarks A/c, Copyright A/c.

Nominal accounts cover every expense or loss (e.g. Rent A/c, Salary A/c, Wages A/c, Loss by Fire A/c) and every income or gain (e.g. Commission Received A/c, Interest Received A/c, Discount Received A/c) of the business for the accounting period. Unlike Personal and Real accounts, a Nominal account does not carry forward a balance from one year to the next — it is closed off, at the end of every year, to the Trading and Profit and Loss Account.

Summary table