The rules of debit and credit under the Traditional approach are golden rules. Let us now understand them and how the accounts are classified.
Classification of Accounts:
1. Personal accounts
2. Impersonal accounts
Nature of accounts can be classified into two types of approaches. Firstly, according to the Traditional approach (Classical Approach or British approach ). The other way is the Modern approach (the American approach).
Traditional Approach of Accounts
Traditional approach classifies the accounts while Modern approach uses the Accounting equation for accounting. Further, under the Traditional approach, all the ledger accounts are classified as “Personal” and “Impersonal accounts”. The rules of debit and credit under the Traditional approach are golden rules. Let us now understand them and how the accounts are classified.
Classification of Accounts:
Hence, Personal accounts are further classified as:
2.Artificial persons and
Let us try and understand in detail.
1] Natural Persons
Natural persons are human beings. Here, we include accounts belonging to humans. Thus, Any individual namelike Ram,Shyam 's A/c ,Debtor’s A/c., Creditor’s A/c., Proprietor’s A/c., Proprietor’s Capital A/c., Proprietor’s Drawings A/c. etc. fall under this category.
2] Artificial Persons
These are those persons who are not human beings but can act and work like humans. They possess a separate identity in the eyes of law. So, they can enter into agreements. They qualify to be penalized too.
These, therefore, include Hindu undivided families, partnership firms, co-operative societies, an association of persons, companies, municipal corporations, hospitals, banks, government bodies, etc.
3] Representative Persons
As the name suggests, these accounts represent the accounts of the persons. These persons may be natural or artificial. Most importantly, when the nominal accounts i.e. those of expenses and incomes become outstanding, pre-paid, accrued or unearned, they fall under this category. Hence, Wages Outstanding A/c, Pre-paid Rent A/c, Accrued Interest A/c, Unearned Commission A/c, etc. fall under this category.
Impersonal Accounts are the accounts other than the Personal Accounts. Hence, these are further classified as:
1. Real Accounts
These accounts are the accounts of all the assets and liabilities of the business. Therefore, these accounts are not closed at the end of the accounting year. Thus, they continue to appear in the Balance Sheet. The balances of these accounts are carried forward to the next accounting year. So, these are permanent accounts and have the following categories:
(a) Tangible Real Account:
It comprises of those assets, properties or possessions that one can touch, see and measure. For example, Building A/c, Furniture A/c, Cash A/c, etc.
(b) Intangible Real Account:
It comprises of those assets or possessions that one cannot touch, see or measure. But these possess a monetary value. Thus, they can be bought and sold also. For example, Goodwill, Patents, Copyrights, Trademark, etc
but the following accounts are not covered under this head although they are assests:
1.Bank A/c - due to belong to Artificial person nature
2.Debtors - same reason
2. Nominal Accounts
Nominal accounts are the accounts related to the
·expenses, losses, incomes, and gains.
·These accounts are temporary accounts. Therefore, the balances of these are transferred to Trading and Profit and Loss A/c at the end of the accounting year. Hence, these accounts have no balance to carry forward next year.
Subscribe to our Newsletter for Latest News & Updates.