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Fundamentals of Accounting · Basic Concepts and Principles of Accounting

Personal, Real and Nominal Accounts: Golden Rules Explained

Updated 11 October 2026 · Fact-checked

Accounts are classified as personal (people and firms), real (assets and properties) and nominal (expenses, losses, incomes, gains). The golden rules: debit the receiver, credit the giver (personal); debit what comes in, credit what goes out (real); debit expenses and losses, credit incomes and gains (nominal).

Understand Accounting Terminology and Classification of Accounts

Accounting has its own vocabulary. You must know the terms before you can record anything. An asset is a resource the business controls that is expected to bring future economic benefit, such as cash, machinery, stock and debtors. A liability is an amount the business owes to outsiders, such as creditors, bank loan and bills payable. Capital is the amount the owner has invested in the business. Drawings is cash or goods the owner takes out for personal use. Drawings reduce capital. They are not a business expense.

The ICAI Framework defines income and expenses in terms of equity. Income is an increase in economic benefits during the accounting period that results in increases in equity, other than contributions from equity participants. Expenses are decreases in economic benefits during the period that result in decreases in equity, other than distributions to equity participants. This is why the owner's capital introduced is not income and drawings are not an expense.

Every transaction affects accounts. Accounts are classified into three groups. A personal account relates to a person, firm, company or institution, for example Ravi's account, Tata Motors Ltd., bank account, or outstanding salary payable to a person. A real account relates to assets and properties, for example cash, building, furniture, stock. A nominal account relates to expenses, losses, incomes and gains, for example rent, salary, interest paid, commission received.

Each group has a golden rule. Personal: debit the receiver, credit the giver. Real: debit what comes in, credit what goes out. Nominal: debit all expenses and losses, credit all incomes and gains. These rules decide which side every entry goes to.

A useful check: a personal account is a person, a real account is a thing you can own, and a nominal account is a flow of profit or loss. Capital and drawings are personal accounts of the owner. Outstanding and prepaid items are treated as personal or real depending on the book you follow, but in basics questions outstanding expenses are treated as personal accounts (a liability) and prepaid expenses as personal accounts (a debtor-like asset).

Key rules to remember

Personal account rule
Debit the receiver; Credit the giver
Applies to persons, firms, companies, banks, and the owner's capital and drawings.
Real account rule
Debit what comes in; Credit what goes out
Applies to assets like cash, goods, building, machinery.
Nominal account rule
Debit all expenses and losses; Credit all incomes and gains
Applies to rent, wages, discount allowed, interest received, commission earned.
Accounting equation
Assets = Liabilities + Capital
Capital = Assets − Liabilities. Drawings reduce capital.
Closing capital
Closing capital = Opening capital + Additional capital + Profit − Drawings − Loss
Use profit or loss, not both.

How to solve Accounting Terminology and Classification of Accounts questions

For any question on terms or on classifying accounts, follow this order.

  1. 1Read the item and ask: is it a person or entity, a thing owned, or an expense/income?
  2. 2Label it: personal, real or nominal.
  3. 3If it is an asset, liability, capital or drawings, note its nature too (asset, liability, capital).
  4. 4Apply the matching golden rule to decide debit or credit.
  5. 5For an entry, identify both accounts affected and apply the rule to each one.
  6. 6Check that total debit equals total credit.
  7. 7Write the classification and the reason in one line for written answers.

Quickest way: Three-question test

When to use it: Use it in MCQs or when you must classify many accounts quickly.

  1. Is it a person, firm, company or bank? Mark Personal.
  2. Is it something the business owns and can touch or hold (including goodwill, patents)? Mark Real.
  3. Is it an expense, loss, income or gain? Mark Nominal.
  4. For debit or credit: Personal, receiver is Dr; Real, incoming is Dr; Nominal, expense is Dr and income is Cr.

Common mistakes in Accounting Terminology and Classification of Accounts

  • Treating drawings as an expense and debiting it to the profit and loss account

    Money leaves the business, so it looks like a cost.

    Fix: Drawings reduce the owner's capital. They are not an expense and do not affect profit.

  • Calling outstanding rent or rent received in advance a nominal account only

    The word rent sounds like an expense or income.

    Fix: The expense or income part is nominal. The amount owed or received in advance is a liability, so it is shown as a personal account.

  • Classifying goodwill, patents or trademarks as nominal

    They are not physical, so students assume they are not real.

    Fix: Real accounts include intangible assets. Goodwill and patents are intangible real accounts.

  • Applying the personal rule to the cash account

    Cash is received from or paid to a person.

    Fix: Cash is a real account. Debit cash when it comes in, credit it when it goes out. The other party gets the personal rule.

  • Debiting an income when it is received

    Money is coming in, so students think debit.

    Fix: Income is nominal, so credit it. The cash coming in is debited in the cash account.

  • Confusing liabilities with expenses, e.g. treating creditors as an expense

    Both involve amounts to be paid.

    Fix: Creditors are a liability for goods or services already received. An expense is the cost charged to profit.

Worked examples

Example 1

Classify the following accounts as personal, real or nominal: (a) Sharma & Sons, (b) Machinery, (c) Salary paid, (d) Commission received, (e) Capital.

Show the solution
  1. Sharma & Sons is a firm, so it is a personal account.
  2. Machinery is an asset the business owns, so it is a real account.
  3. Salary paid is an expense, so it is a nominal account.
  4. Commission received is an income, so it is a nominal account.
  5. Capital is the owner's investment. It is the owner's account, so it is a personal account.

Answer: (a) Personal, (b) Real, (c) Nominal, (d) Nominal, (e) Personal.

Example 2

Mr. Mehta started business with cash ₹5,00,000. He bought furniture for ₹80,000 for cash and paid rent ₹12,000. He sold goods to Anil on credit for ₹30,000. State the accounts debited and credited, and their types, for each transaction.

Show the solution
  1. Started business: Cash comes in, so debit Cash (real). Capital is the giver, so credit Capital (personal) ₹5,00,000.
  2. Furniture bought for cash: Furniture comes in, so debit Furniture (real). Cash goes out, so credit Cash (real) ₹80,000.
  3. Rent paid: Rent is an expense, so debit Rent (nominal). Cash goes out, so credit Cash (real) ₹12,000.
  4. Goods sold to Anil on credit: Anil is the receiver, so debit Anil (personal). Sales is an income, so credit Sales (nominal) ₹30,000.
  5. Check: each entry has equal debit and credit.

Answer: 1) Dr Cash, Cr Capital ₹5,00,000. 2) Dr Furniture, Cr Cash ₹80,000. 3) Dr Rent, Cr Cash ₹12,000. 4) Dr Anil, Cr Sales ₹30,000.

Exam tips

  • In MCQs, first label the account type. Most questions can be solved by the label alone.
  • Learn the exact definitions of asset, liability, capital and drawings. Written questions often ask you to define and give two examples each.
  • For written answers, give the account, its type and the reason in one line. This earns marks even if the final entry has a slip.
  • Remember intangible items like goodwill and patents are real accounts, and drawings and capital are personal.
  • Use the 15 minutes of reading time to mark which questions ask for classification and which for entries.

Practice questions from Basic Concepts and Principles of Accounting

Accounting Terminology and Classification of Accounts: frequently asked questions

What are the three types of accounts in accounting?

They are personal, real and nominal accounts. Personal accounts relate to persons and entities, real accounts to assets, and nominal accounts to expenses, losses, incomes and gains.

What are the golden rules of accounting?

For personal accounts, debit the receiver and credit the giver. For real accounts, debit what comes in and credit what goes out. For nominal accounts, debit expenses and losses and credit incomes and gains.

Is drawings an expense?

No. Drawings are amounts the owner takes for personal use and they reduce capital. They are not charged to the profit and loss account.

Is capital an asset or a liability?

Capital is neither an asset nor a liability to outsiders. It is the owner's claim on the business, so Capital = Assets − Liabilities. For accounting, it is treated as the owner's personal account.