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 traditional Approach classifies accounts while the Modern approach uses the Accounting equation for accounting. All the ledger accounts are classified as ‘Personal’ and ‘Impersonal accounts’ under the Traditional approach.
Certain rules apply for Debit and Credit in the Traditional approach, such as
Debit is what comes in whereas credit is what goes out.
Debit refers to the expenses and the losses, and
Credit refers to 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.
Financial Accounts are Classified into:
The Traditional Approach to Financial accounting is also referred to as the British approach
The Modern approach, or also referred to as the American approach.
Traditional account, accounts are classified into
Personal Accounts, and
These accounts are accounts that belong to human beings or natural persons and even artificial persons. Personal accounts are further classified into:
Natural persons, Artificial persons, Representative persons.
We will understand the mentioned in detail.
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.
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.
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. come into this category.
Accounts that are not included in the Personal Accounts, Impersonal Accounts fall under two categories.
1) Real accounts and 2) Nominal accounts.
Real Accounts are related to all the assets and liabilities of a business and these accounts are not closed at the end of the accounting year. They continue to appear in the financial statement of a company, in the Balance Sheet and carried forward to the upcoming accounting year.
These are permanent accounts and they fall into the following categories :
Tangible Real Account are those assets, properties, or possessions that can be touched, seen or measured. Some examples of this are the Building A/c, Furniture A/c, Cash A/c.
Intangible Real Account comprises all assets and possessions which one cannot touch, see or measure, and these have a monetary value. These can be bought and sold even. Certain examples are Goodwill, Patents, Copyrights, Trademark, etc.
Nominal Accounts are accounts that are related to the expenses, the losses, the incomes, and the gains, and these are temporary accounts. The balances of these are transferred to the Trading and Profit and Loss A/c at the end of the accounting year. These accounts don't have a balance that needs to be carried forward to the next year.