The Traditional Approach distinguishes the accounts while the modern approach implements the accounting equation required for accounting. Under the traditional approach, the ledger accounts are then classified into - Personal and Impersonal accounts. The rules of debit and credit that are directed in this traditional approach are the golden rules.
The Golden Rules:
Debit what comes in - credit what goes out.
Debit refers to the expenses and the losses
While Credit is the income and gains.
Traditional Approach of Financial Accounting
The financial accounts are to be classified into two types of approaches. First, according to the traditional approach also known as the British approach. The other is the Modern approach also known as the American approach. The Key factors under the Traditional approach are the personal and impersonal accounts which we will further illustrate in the prevailing sections.
Classification of Accounts
In the traditional approach, the accounts are classified into the following accounts -
These accounts can be understood by their name itself, meaning that they are the accounts of human beings or natural persons and even accounts for the artificial persons. Hence, with this notion Personal accounts are further classified into:
We will understand the mentioned in detail.
1. Natural Persons
Natural persons are human beings. In this case, we include accounts belonging to humans, meaning respective accounts are owned by individual persons. So, Debtor’s A/c., then the Creditor’s A/c., Proprietor’s A/c., Proprietor’s Capital A/c., Proprietor’s Drawings A/c. all fall under this category.
2. Artificial Persons
These are the persons who are not human beings but legally can act and work like humans. As mentioned, artificial persons, possess a separate identity in the eyes of law. Thus, they can enter into any contractual agreements. With this, they qualify to be penalized too. HUF also known as the Hindu undivided families, partnership firms, the co-operative societies, associations of persons, companies, the municipal corporations, even the hospitals, baking sectors, government bodies, etc all are artificial persons under the eyes of the law.
3. Representative Persons
As suggested by the name, these accounts merely represent the accounts of the persons. These persons may be natural and even artificial. The nominal accounts of expenses and incomes which are outstanding, pre-paid, accrued, or unearned, fall under this representative person’s category. Thus, Wages Outstanding A/c, Prepaid Rent A/c, Accrued Interest A/c, Unearned Commission A/c, etc. comes into this category.
Impersonal Accounts are the accounts that are left out of the Personal Accounts. Impersonal Accounts are further classified as:
1. Real Accounts
These accounts are related to all the assets and liabilities of the business. These accounts are not closed at the end of the accounting year. Thus, they continue to appear in the financial statement of a company, namely in the Balance Sheet. The balances of these accounts are then carried forward to the upcoming accounting year. So, these are the permanent accounts and they have the following categories:
This comprises those assets, properties, or possessions which can be touched, see and measure. Example, Building A/c, Furniture A/c, Cash A/c, etc.
It comprises the assets or possessions where one cannot touch, see or measure. Though these possess a monetary value. This can be bought and sold even. Example, Goodwill, Patents, Copyrights, Trademark, etc.
2. Nominal Accounts
Nominal accounts are the accounts that are related to the expenses, losses, incomes, and gains. These accounts are temporary in nature. Hence, the balances of these are transferred to Trading and Profit and Loss A/c at the end of the accounting year. These accounts do not have a balance that is to be carried forward in the next year.