Real, personal and nominal accounts

Open a business’s ledger for the first time and it can look like a long, mixed list of accounts: cash, rent, a customer named Lim, machinery, sales, wages. But these accounts are not all the same kind of thing. Traditional accounting sorts every account into three families: real accounts, personal accounts and nominal accounts.

The classification is not about which book an account is filed in. It is about the nature of what the account records. Once you know the family, you know how the account behaves.

What the three families are for

An account is a record of one thing: one asset, one person the business deals with, or one type of income or expense. But these things differ. A machine is a possession.

A customer is a relationship. Rent is a cost that is used up over time.

Grouping accounts by nature gives the flat list an order. It answers one question: what sort of thing is this account about? The answer tells you where its balance will go at the year end, without learning each account one by one.

Real accounts: things the business owns

A real account records something the business owns, an asset. Cash, inventory, machinery, motor vehicles, fixtures and buildings all have real accounts. Each stands for a resource the business holds.

Real accounts also cover intangible assets such as goodwill. You cannot touch goodwill, but it is still a resource with value. A machine bought for RM40,000 sits in a real account because it is a possession, not a cost already used up.

Personal accounts: the parties a business deals with

A personal account records dealings with a particular person or organisation. A customer who buys on credit has a personal account showing what they owe.

A supplier the business buys from on credit has one showing what is owed to them. The owner’s capital account is personal too, as are accounts for a bank or a lender.

Behind every personal account is a named party. The business must know how much each customer owes and how much it owes each supplier, not just the totals.

Nominal accounts: income, expenses, gains and losses

A nominal account records a type of income or expense, not a thing or a person. Sales, purchases, rent, wages, electricity, discount received and commission earned all have nominal accounts. They capture the flows of a trading period: revenue earned and costs incurred.

A nominal account has nothing lasting you could point to. Rent paid of RM6,000 is not a possession.

It is a cost used up during the year. Nominal accounts record what the business earned and spent, as opposed to what it owns or who it deals with.

Why “nominal” means in name only

Nominal means “in name only”. The account is a heading in the books, with no physical asset or person behind it. So nominal accounts are not carried forward from year to year.

At the end of the period their balances are transferred to the income statement, and each account starts the next period at zero. A machinery account, by contrast, carries its balance forward because the machine is still there.

How the family decides where a balance goes

The balances on real and personal accounts are the raw material of the statement of financial position. These are the assets owned, the amounts owed to the business, the amounts it owes and the owner’s capital. The balances on nominal accounts, income and expenses, go into the income statement to work out profit or loss.

So the family decides the destination. Ask which family an account is in, and you know whether its balance ends up on the statement of financial position or in the income statement.

Why this helps a learner

The families let you reason about an unfamiliar account instead of memorising a rule for each. Take three examples.

• Insurance is a cost, so it is nominal and closes to the income statement.
• A delivery van is a possession, so it is real and stays on the statement of financial position.
• A customer’s balance is a relationship, so it is personal and shows money still to come in.

Dozens of accounts become three types. That is why the ledger is organised this way.

If the three families still feel abstract, one of our teachers can show your child how to place any account in the right family. They can use past-paper trial balances to show where each balance belongs. Book a trial class