In the field of accounting, categorizing accounts is crucial for maintaining clarity and consistency in financial records. One important classification is the division between personal and impersonal accounts. Impersonal accounts do not relate to any specific person or legal entity. Instead, they deal with non-human aspects of business operations such as assets, liabilities, expenses, and income. Understanding the nature of impersonal accounts and identifying relevant examples helps in accurate bookkeeping, preparation of financial statements, and compliance with accounting standards.
Understanding Impersonal Accounts
Definition of Impersonal Account
An impersonal account is an account that does not belong to any individual, firm, or company. It typically records business elements that are not associated with a person. These accounts are further divided into two subcategories: real accounts and nominal accounts.
- Real Accounts: These are accounts related to tangible and intangible assets of the business, such as machinery, buildings, or goodwill.
- Nominal Accounts: These include income, gains, expenses, and losses, such as rent, interest income, or salaries.
Difference Between Personal and Impersonal Accounts
While personal accounts are linked to individuals or organizations and include customer or vendor accounts, impersonal accounts are associated with non-living elements of business. For example, a supplier’s account is personal, whereas a furniture account is impersonal.
Examples of Impersonal Accounts
1. Cash Account
This is a real account and one of the most common types of impersonal accounts. It represents the physical cash available with a business. All cash inflows and outflows are recorded in this account.
2. Bank Account
The bank account records all transactions involving a business’s bank. It includes deposits, withdrawals, interest earned, and bank charges. Though a bank is a person, in accounting terms, this account is generally treated as impersonal when seen from the perspective of asset management.
3. Furniture and Fixtures Account
All purchases and disposal of furniture, chairs, tables, and related fixtures are recorded under this real account. It helps track the value of fixed assets in the organization.
4. Buildings Account
This real account keeps a record of the cost or book value of buildings owned by a business. It includes offices, warehouses, or any other physical structures.
5. Machinery Account
This is another real account used for recording purchases and depreciation of business machinery. It helps monitor the value of machinery assets over time.
6. Sales Account
A nominal account, the sales account records all revenue generated from selling goods or services. It plays a vital role in determining the profitability of the business.
7. Purchase Account
This nominal account captures all expenses related to the purchase of goods intended for resale. It excludes purchases of fixed assets, which are recorded in their respective accounts.
8. Rent Expense Account
This account records payments made towards renting office space, equipment, or other assets. It’s a nominal account reflecting a recurring expense.
9. Salaries and Wages Account
This is another nominal account where all payments to employees for their work are recorded. It helps in tracking payroll expenses for financial and tax purposes.
10. Interest Received Account
This nominal account captures income earned through bank interest, loans provided to others, or any other interest-bearing activity. It contributes to the overall income of the business.
Classification of Impersonal Accounts
Real Accounts
These represent the business’s assets and properties. They can be tangible like land or intangible like patents. Real accounts follow the rule: ‘Debit what comes in, Credit what goes out.’
Examples:
- Land Account
- Inventory Account
- Vehicle Account
- Goodwill Account
Nominal Accounts
These represent income, expenses, losses, and gains. They are temporary accounts closed at the end of each accounting period. They follow the rule: ‘Debit all expenses and losses, Credit all incomes and gains.’
Examples:
- Commission Received Account
- Electricity Charges Account
- Insurance Premium Account
- Repair and Maintenance Account
Importance of Impersonal Accounts in Accounting
Accurate Financial Reporting
Impersonal accounts help businesses properly categorize and record transactions that affect non-personal aspects. This ensures that financial statements accurately reflect the company’s position.
Simplifies Auditing and Analysis
Since impersonal accounts are systematically organized into assets, liabilities, income, and expenses, they simplify the work of auditors and financial analysts during evaluations.
Helps in Cost Control
By reviewing nominal impersonal accounts such as advertising, travel, or utilities, management can identify areas of overspending and implement cost-saving measures.
Supports Tax Compliance
Correct recording of income and expense-related impersonal accounts ensures proper tax calculation, deduction tracking, and compliance with government regulations.
Recording Rules for Impersonal Accounts
Golden Rules of Accounting
- Real Account: Debit what comes in, Credit what goes out.
- Nominal Account: Debit all expenses and losses, Credit all incomes and gains.
Applying these rules helps accountants make accurate journal entries. For example, if furniture is purchased for office use, the journal entry would be:
Furniture A/C Dr.
To Cash/Bank A/C
Common Mistakes to Avoid
- Confusing personal accounts like creditor or debtor accounts with impersonal ones like salary or rent accounts.
- Recording asset purchases like equipment under purchase account instead of relevant real accounts.
- Ignoring depreciation in fixed asset accounts, leading to overstated asset values.
- Combining multiple expense types into one account, which reduces clarity and accuracy.
Impersonal accounts form the backbone of a business’s accounting system, capturing critical information about assets, income, expenses, and financial operations that are not linked to any individual. By understanding the classification and examples of impersonal accounts, businesses can maintain accurate records, enhance decision-making, and ensure compliance with legal standards. Whether it’s the cash account, rent expense, or machinery, each impersonal account plays a role in portraying the financial health of the organization. With a well-organized chart of accounts and consistent accounting practices, tracking impersonal accounts becomes an efficient part of any sound financial management strategy.