Nature of Accounts: Easy Guide to Score Better in Exams

 

Understanding the Nature of Accounts: Easy Guide for Exams

The Nature of Accounts helps us identify what type of account is involved in a transaction so we can pass the correct journal entry. In accounting, every transaction affects at least two accounts, and understanding their nature helps decide which account should be debited and which should be credited.

Most students memorize “Debit the receiver, Credit the giver” without understanding why. That is exactly where confusion begins — especially in exams.

And honestly, this topic feels difficult only until someone explains the logic behind it properly.

 

A Real Confusion Students Often Face

One student once asked me:

“Sir, if cash comes into the business, why do we debit cash? Isn’t money increasing? Shouldn’t increase mean credit?”

This is one of the most common confusions in accounting.

The problem is not intelligence.
The problem is that students try to remember rules without understanding the nature of the account first.

Once you understand what type of account cash is, the entire system becomes logical.

 

What Is the Nature of Accounts?

The Nature of Accounts means the classification of accounts according to what they represent.

Accounting divides all accounts into three main categories:

Type of Account	Meaning	Rule
Personal Account	Related to persons, companies, banks	Debit the Receiver, Credit the Giver
Real Account	Related to assets and property	Debit What Comes In, Credit What Goes Out
Nominal Account	Related to expenses, losses, income, gains	Debit Expenses & Losses, Credit Income & Gains

This classification exists because businesses deal with many different kinds of transactions every day.

For example:

• Paying salary → Expense
• Buying machinery → Asset
• Receiving loan from bank → Personal account

If we use one single rule for everything, accounting becomes messy.

So accountants created different categories based on the nature of the item involved.

 

Why Does the Concept of Nature of Accounts Exist?

Imagine running a grocery shop in Indore.

Every day you:

• Buy goods
• Sell products
• Pay electricity bill
• Receive money from customers
• Deposit money in bank
• Take a loan

Now think practically:

Should salary expense be treated the same way as furniture?
Should bank account be treated the same way as rent expense?

Obviously not.

That is why accounting classifies accounts based on their nature.

This classification helps in:

• Recording transactions correctly
• Avoiding journal entry mistakes
• Preparing financial statements
• Understanding business performance

Without this system, accounting would become random and confusing.

 

The Three Types of Accounts Explained Simply

1. Personal Account

Personal Accounts are accounts related to:

• Individuals
• Firms
• Companies
• Banks
• Institutions

Examples

• Ram Account
• SBI Bank Account
• Reliance Industries Account
• Creditor Account
• Debtor Account

Golden Rule

Debit the Receiver
Credit the Giver

Example

Paid ₹5,000 to Mohan.

• Mohan is receiving money
• So Mohan’s Account is Debited
• Cash is going out → Cash Account Credited

Journal Entry

Particulars	Debit	Credit
Mohan A/c Dr.	5,000
To Cash A/c		5,000

 

2. Real Account

Real Accounts relate to assets and property.

These can be:

• Tangible Assets → Furniture, Building, Machinery
• Intangible Assets → Patent, Trademark, Goodwill

Golden Rule

Debit What Comes In
Credit What Goes Out

Examples

• Cash Account
• Machinery Account
• Furniture Account
• Land Account

Example

Purchased furniture worth ₹20,000 in cash.

• Furniture comes in → Debit Furniture
• Cash goes out → Credit Cash

Journal Entry

Particulars	Debit	Credit
Furniture A/c Dr.	20,000
To Cash A/c		20,000

 

3. Nominal Account

Nominal Accounts relate to:

• Expenses
• Losses
• Income
• Gains

These accounts are temporary and reset at year-end.

Golden Rule

Debit Expenses and Losses
Credit Income and Gains

Examples

• Salary Account
• Rent Account
• Commission Received
• Interest Earned

Example

Paid salary ₹12,000.

• Salary is an expense → Debit
• Cash goes out → Credit

Journal Entry

Particulars	Debit	Credit
Salary A/c Dr.	12,000
To Cash A/c		12,000

 

Easy Trick to Remember the Nature of Accounts

Here’s a shortcut I teach students before exams:

Ask This Question	Account Type
Is it a person or organization?	Personal
Is it an asset or property?	Real
Is it income, expense, gain, or loss?	Nominal

This simple thinking process solves most journal entry problems.

 

Step-by-Step Example With Full Logic

Let’s understand with a complete business scenario.

Scenario

A shopkeeper purchased a machine for ₹50,000 from Raj Traders and paid cash immediately.

Now think carefully.

Step 1: Identify Accounts

Two accounts are involved:

• Machinery Account
• Cash Account

Step 2: Find Nature of Accounts

Account	Nature
Machinery	Real Account
Cash	Real Account

Step 3: Apply Rules

Machinery comes into business → Debit
Cash goes out → Credit

Final Journal Entry

Particulars	Debit	Credit
Machinery A/c Dr.	50,000
To Cash A/c		50,000

This is how professional accountants think.

Not by memorizing blindly — but by identifying the nature first.

 

Why This Matters in Real Life

Many students think this topic exists only for exams.

But in reality, the entire accounting system of businesses depends on this logic.

Imagine a business owner checking:

• Profit
• Expenses
• Assets
• Loans
• Customer dues

If transactions are recorded incorrectly:

• Profit becomes wrong
• Tax calculation becomes wrong
• Financial reports become misleading

Even small businesses in cities like Gwalior or Bhopal use these accounting principles daily through accounting software like Tally or ERP systems.

The software may automate entries, but the logic behind it is still based on the Nature of Accounts.

 

Personal Teaching Moment

I once taught a Class 11 student who failed journal entries repeatedly.

He had memorized all rules but still got confused.

Then I told him:

“Forget debit-credit for 5 minutes. First ask: What kind of account is this?”

Within two weeks, his mistakes reduced dramatically.

That moment reminded me that accounting becomes easy only when students understand the logic first.

 

Difference Between Personal, Real, and Nominal Accounts

Difference Table

Basis	Personal Account	Real Account	Nominal Account
Related To	Persons/Organizations	Assets/Property	Expenses/Incomes
Nature	Human or legal entity	Permanent assets	Temporary accounts
Rule	Debit Receiver	Debit What Comes In	Debit Expenses
Example	Bank A/c	Machinery A/c	Salary A/c
Appears In	Balance Sheet	Balance Sheet	Trading/P&L A/c

This comparison is very important for school and competitive exams.

 

Real-Life Examples Students Understand Easily

Example 1: Paying Electricity Bill

• Electricity Expense → Nominal Account
• Cash → Real Account

Example 2: Depositing Cash in Bank

• Bank Account → Personal Account
• Cash Account → Real Account

Example 3: Buying Laptop for Office

• Laptop/Furniture → Real Account
• Cash/Bank → Real Account

 

What Happens in Accounting Software?

This is something beginners usually miss.

In software like:

• Tally
• Busy
• Zoho Books

You often select ledger groups instead of manually applying rules.

But internally, the software still classifies accounts based on:

• Personal
• Real
• Nominal

That means understanding the Nature of Accounts is still extremely important even in computerized accounting.

 

Common Mistakes Students Make

1. Memorizing Without Classification

Students jump directly to debit-credit rules.

Wrong approach.

First identify account type.

 

2. Confusing Bank Account

Many students ask:

“Bank is an asset, then why personal account?”

Because bank represents an institution/entity.

So traditionally it is treated as a Personal Account.

 

3. Treating All Incoming Things as Debit

Sometimes students debit wrongly because something “comes in.”

But if it is income, the rule changes.

Example:

Commission Received → Credit because it is income.

 

4. Ignoring the Nature of Cash

Cash is a Real Account, not Personal.

This creates many journal entry mistakes.

 

Exam Tip (Important)

In board exams and entrance tests, the examiner usually checks one thing first:

Did the student correctly identify the nature of the account?

Even if the format is slightly imperfect, correct identification often saves marks.

Fast Exam Strategy

Whenever you see a transaction:

1. Identify accounts
2. Write nature beside each
3. Apply rule
4. Pass entry

This reduces silly mistakes under pressure.

 

Advanced Insight Beginners Usually Miss

Here is an important real-world insight.

Modern accounting standards today mainly follow the:

• Asset approach
• Liability approach
• Income-expense approach

So technically, the traditional classification into Personal, Real, and Nominal Accounts is more useful for learning journal entries than for advanced accounting frameworks.

But educational systems in India still teach this method because it builds accounting logic strongly at the beginner level.

That’s why CA Foundation, Class 11, Class 12, B.Com, and competitive exams continue using it heavily.

This deeper understanding helps students connect textbook accounting with practical accounting systems.

 

Research Context: Why This Topic Remains Important

Educational research in accounting learning shows that students struggle more with:

• Transaction analysis
• Classification
• Debit-credit logic

than with calculations.

That is why commerce teachers spend significant time on the Nature of Accounts before moving to:

• Ledger posting
• Trial balance
• Final accounts

It acts as the foundation of the entire accounting cycle.

 

Journal Entry Illustration Practice

Transaction

Received ₹15,000 rent from tenant.

Analysis

Account	Nature
Cash	Real
Rent Received	Nominal

Rule Applied

Cash comes in → Debit
Income received → Credit

Journal Entry

Particulars	Debit	Credit
Cash A/c Dr.	15,000
To Rent Received A/c		15,000

 

Practical Decision-Making Scenario

Suppose you run a coaching institute.

One month you purchase:

• Chairs
• Whiteboard
• Projector

A beginner may think all payments are expenses.

But an accountant knows:

These are assets (Real Accounts), not daily expenses.

Why does this matter?

Because:

• Expenses reduce profit immediately
• Assets provide long-term benefit

This single classification affects:

• Profit calculation
• Tax reporting
• Financial planning

That is why the Nature of Accounts is not just theory — it affects real business decisions.

 

Practice Questions

Question 1

Purchased goods from Ramesh on credit ₹8,000. Identify account nature and pass journal entry.

 Question 2

Paid office rent ₹12,000 by cheque. Find account types and journal entry.

 Question 3

Received commission ₹5,000 in cash. Classify accounts and apply rules.

 

Frequently Asked Questions (FAQs)

What is the easiest way to understand the Nature of Accounts?

First identify whether the transaction relates to:

• Person
• Asset
• Expense/Income

Then apply the rule.

 

Is cash a real account?

Yes. Cash is a Real Account because it is an asset of the business.

 

Why is bank account treated as personal account?

Because the bank represents an institution or artificial person.

 

Are salaries nominal accounts?

Yes. Salary is an expense, so it is a Nominal Account.

 

Is goodwill a real account?

Yes. Goodwill is an intangible asset, so it is a Real Account.

 

Why do students confuse debit and credit?

Mostly because they memorize rules without understanding account nature first.

 

Is Nature of Accounts important for competitive exams?

Absolutely. It is one of the most important accounting foundations for:

• Class 11
• Class 12
• CA Foundation
• CUET
• B.Com entrance tests

 

References and Learning Context

This article is based on foundational accounting principles commonly taught in:

• Indian school commerce curriculum
• Financial accounting frameworks
• Traditional double-entry bookkeeping system
• Beginner-level accounting education methodology

Concepts discussed align with standard accounting practices followed in introductory commerce education in India.

 

Guidepost Topics  

• What is Double Entry System in Accounting?
• Difference Between Capital and Revenue Expenditure
• How to Pass Journal Entries Easily in Exams?

 

Author Bio

Hi, I’m Manoj Kumar.
I hold an MBA and have practical exposure to accounting, taxation, and business concepts. Along with this, I’ve spent time guiding and explaining these subjects to students in a way that actually makes sense to them.

In my experience, most students don’t find commerce difficult — they just don’t get the right explanation. That’s where I focus. I break down concepts into simple, logical steps so they are easier to understand and remember.

Through Learn with Manika, I aim to make commerce learning clear, practical, and useful — whether you’re preparing for exams or trying to understand how things work in real life. When I explain a concept, I always focus on the logic behind it, because once that becomes clear, confidence automatically follows.

 

Disclaimer

This article is for educational purposes only and should not be considered professional advice.