TRADITIONAL CLASSIFICATION OF ACCOUNT

There are two approaches to accounting for financial transactions viz: modern and traditional approaches.

The traditional approach is the British approach to accounting for financial transactions. Hence, the traditional approach is also called the British approach

The modern approach is the American approach to accounting for financial transactions. Hence, it is also called the American approach.

For our post title, we will be limiting our focus to the traditional approach to the classification of accounts.

The traditional classification of accounts

According to the traditional classification of accounts, ledger accounts are divided into two: personal accounts and impersonal accounts.

Personal account

These are accounts in the names of persons, whether natural or legal entities, who have business dealings with the organization.

They are accounts used to record transactions with persons or groups of persons so that the sum owing or owed to them can be determined.

Personal accounts can be sub-divided into natural persons, artificial persons, and groups/representative accounts.

1. Natural persons: These are accounts used for recording transactions with real human beings.

Natural person accounts include James' account, John's account, Vanessa's account, Capital account, and Drawings account

2. Artificial or legal persons: These are accounts for recording financial transactions involving artificial persons.

Artificial persons are persons that are not human beings but are persons in the eyes of the laws. Artificial persons can enter into contracts with other people or businesses since they are legal entities.

Natural person accounts include corporation society accounts, limited liability accounts, educational institution accounts, and government entities accounts.

3. Groups/representative persons: These accounts indirectly represent persons or groups of persons

Representative accounts are used to group transactions of similar accounts that occur frequently.

Representative accounts are mostly used to record outstanding expenses, prepaid expenses, deferred revenue and accrued revenue, and outstanding rent.

Examples are prepaid insurance, apprentice premium carried over (unearned revenue), unearned commission and  

The golden rule for personal accounts is this: debit the receiver and credit the giver.

Impersonal accounts

These are non-personal accounts. That is, there are accounts that are not personal accounts. 

Impersonal accounts can be classified into two: real accounts and nominal accounts.

1. Real accounts: These are accounts relating to assets, liabilities and properties.

Real accounts are not closed at the end of an accounting year as their balances are carried forward to the next accounting year.

For this reason, real accounts are also known as permanent accounts.

Real accounts are usually entered in the statement of financial position (balance sheet)

Real accounts can be further classified into two: tangible and intangible real accounts.

A. Tangible real accounts: These are assets and properties that can be seen, touched, felt, and quantified in monetary terms

Examples are furniture account, equipment account, cash account, bank account, building account, and land account

B. Intangible real accounts: These are assets that can't be seen, touched, or felt, but can be quantified in monetary terms.

Patents, copyright, and goodwill accounts are just a few examples of intangible real accounts 

The golden rule for real accounts is to debit what comes in, and credit what goes out.

2. Nominal accounts: These are accounts relating to expenses, gain, loss and income.

Unlike real accounts, whose balance is usually carried forward, the balance of nominal accounts is usually closed at the end of an accounting year.

The balance of the nominal accounts is moved to the statement of profit or loss account, allowing net profit or loss to be calculated.

Nominal accounts are sometimes called fictitious accounts or temporary accounts.

Salary and wages expenses, rent paid, and commission received are examples of nominal accounts.

The golden rule of nominal accounts is this: Debit all expenses and losses and credit all revenue and gains.

Final words

To repeat, the traditional classification of accounts classifies accounts into two types: Personal and impersonal accounts.

Personal accounts are of three types: natural persons, artificial persons and representative persons.

Impersonal accounts can be subdivided into real accounts and nominal accounts.

Rules for debiting the personal, real and nominal accounts
Account typeRules for debiting and crediting
Personal account Debit the receiver
credit the giver
Real account Debit is what comes in
credit what goes out
Nominal account Debit all expenses and losses
credit all income and gains

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