Types of Accounts: Traditional and Modern Accounting

In accounting, classification of accounts is essential to systematically record, analyze, and interpret business transactions. There are two main approaches to classifying accounts:

Traditional Classification of Accounts:

The Traditional Approach classifies all accounts into three main types, and each has specific rules for debit and credit. These are known as the Golden Rules of Accounting.

A. Personal Accounts

These accounts relate to individuals, firms, companies, and institutions.

• Examples: Ram’s Account, State Bank of India Account, Creditors, Debtors

• Golden Rule:
    Debit the Receiver, Credit the Giver

Example: If cash is paid to Ram, Ram is receiving the value.
  → Debit Ram’s Account
  → Credit Cash Account

B. Real Accounts

These accounts relate to assets and properties — both tangible (like buildings) and intangible (like goodwill).

• Examples: Cash, Machinery, Building, Goodwill

• Golden Rule:
    Debit what comes in, Credit what goes out

Example: When furniture is purchased for cash:
  → Debit Furniture Account (asset coming in)
  → Credit Cash Account (asset going out)

C. Nominal Accounts

These accounts relate to expenses, losses, incomes, and gains.

• Examples: Salary, Rent, Commission Received, Interest Paid

• Golden Rule:
    Debit all expenses and losses, Credit all incomes and gains

Example: If salary is paid:
  → Debit Salary Account (expense)
  → Credit Cash Account (asset going out)

Modern Classification of Accounts:

Modern or Accounting Equation Approach is based on the equation:

  Assets = Liabilities + Owner’s Equity

Under this system, accounts are classified into five major types:

A. Asset Accounts

These represent resources owned by a business that provide future benefits.

• Examples: Cash, Inventory, Buildings, Vehicles, Prepaid Expenses

• Rule: Increase in assets = Debit, Decrease = Credit

Example: Buying machinery:
  → Debit Machinery Account
  → Credit Cash/Bank Account

B. Liability Accounts

These represent obligations or debts owed by the business to outsiders.

• Examples: Creditors, Loans Payable, Bills Payable, Outstanding Expenses

• Rule: Increase in liabilities = Credit, Decrease = Debit

Example: Taking a loan:
  → Debit Bank Account
  → Credit Loan Account

C. Equity (Capital) Accounts

These represent the owner’s interest in the business. It includes capital introduced and retained earnings.

• Examples: Owner’s Capital, Retained Earnings, Drawings

• Rule: Increase in equity = Credit, Decrease = Debit

Example: Owner invests cash in business:
  → Debit Cash Account
  → Credit Capital Account

D. Revenue (Income) Accounts

These represent income earned by the business through sales or services.

• Examples: Sales, Interest Income, Commission Received

• Rule: Increase in income = Credit, Decrease = Debit

Example: Goods sold for cash:
  → Debit Cash Account
  → Credit Sales Account

E. Expense Accounts

These represent costs incurred in the process of earning revenue.

• Examples: Rent, Salary, Utilities, Advertising

• Rule: Increase in expense = Debit, Decrease = Credit

Example: Paying rent:
  → Debit Rent Expense Account
  → Credit Cash Account

Key Differences between Traditional and Modern Approach