Everything in a business has its own account which falls under one of 5 types of accounts or 3 classes of accounts. The 5 types of accounts are assets, liabilities, income, capital and expenses, also known as ALICE accounts.
Each account shows details of an item from the date it enters a business, the activities it performs during certain periods, and the date it no longer exists in the business. This article shows how the ALICE accounts are divided into 3 classes of accounts.
3 Classes of accounts
The 3 classes of accounts are real accounts, nominal accounts and personal accounts. It is very important to note that dividing the ALICE accounts into these 3 classes of accounts is not clear-cut and students should pay attention to this topic.
Real accounts are impersonal accounts that remain in a business after an accounting period and continue to function in another period. These include:
- Assets such as land, buildings, machinery, stock, cash and accounts receivable
- Liabilities such as notes payable, accounts payable and wages payable
- Equity such as retained earnings
All real accounts appear in the Balance Sheet. However, not all accounts that are assets, liabilities and equity fall under real accounts because some of them are not impersonal accounts.
Nominal accounts are also impersonal accounts but relate to expenses, losses, incomes and gains, and they only stay within a business for a particular period. These include:
- Expenses such as purchases, rent expense, salaries, utilities, advertising, insurance, depreciation and bad debts
- Losses such as from fire, theft, net loss and loss on sale of equipment
- Revenue such as sales, rent revenue, dividend revenue and interest revenue
- Gains such as net profit and gain on sale of land
All nominal accounts appear in the Income Statement. Note that owed revenues and owed expenses accounts are not nominal accounts because these are not impersonal and they roll over to another period.
Personal accounts relate to accounts in the name of persons and businesses. These accounts fall under:
- Assets as debtors, prepaid expenses, owed revenue and bank
- Liabilities as creditors, owed expenses and prepaid revenue
- Capital and drawings
These accounts are classed separately from impersonal accounts.
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