What Is Impersonal Account?

A comprehensive guide to impersonal accounts, their historical context, types, key events, detailed explanations, and their importance in accounting and finance.

Introduction

An impersonal account is a ledger account that does not bear the name of a person but instead refers to various types of accounts such as nominal accounts or real accounts. This article explores the historical context, types, key events, and detailed explanations of impersonal accounts and their importance in accounting and finance.

Historical Context

The concept of impersonal accounts can be traced back to the development of double-entry bookkeeping in the 14th century by the Italian mathematician Luca Pacioli. This method revolutionized accounting by categorizing transactions into personal and impersonal accounts, helping in the efficient recording and tracking of financial transactions.

Types of Impersonal Accounts

Impersonal accounts are broadly categorized into two types:

• Nominal Accounts: These accounts relate to expenses, losses, incomes, and gains. Examples include:

  • Rent Account
  • Salary Account
  • Interest Received Account

• Real Accounts: These accounts pertain to assets and liabilities. Examples include:

  • Building Account
  • Machinery Account
  • Cash Account

Key Events

• 14th Century: The introduction of double-entry bookkeeping by Luca Pacioli.
• 19th Century: Standardization of accounting practices with the establishment of accounting bodies.
• 20th Century: Introduction of computerized accounting systems, enhancing the management of impersonal accounts.

Detailed Explanations

Nominal Accounts

Nominal accounts are temporary accounts that record the incomes and expenditures of a business over an accounting period. They are closed at the end of the period to prepare financial statements.

Example:

1Rent Account
2--------------------
3Debit | Credit
4--------------------
5500   | 0

This shows the expenditure on rent for the accounting period.

Real Accounts

Real accounts, also known as permanent accounts, record assets and liabilities and carry their balances forward from one accounting period to the next.

Example:

1Building Account
2--------------------
3Debit  | Credit
4--------------------
5100,000 | 0

This represents the cost of a building owned by the business.

Mathematical Formulas/Models

Basic Equation of Accounting:

$$ \text{Assets} = \text{Liabilities} + \text{Equity} $$

Nominal Account Closure:

$$ \text{Total Expenses} + \text{Total Losses} = \text{Total Incomes} + \text{Total Gains} $$

Charts and Diagrams

    graph TB
	  A[Ledger Accounts] -->|Personal Accounts| B[Debtors Accounts]
	  A -->|Impersonal Accounts| C[Nominal Accounts]
	  A -->|Impersonal Accounts| D[Real Accounts]
	  C --> E[Revenue]
	  C --> F[Expenses]
	  D --> G[Assets]
	  D --> H[Liabilities]

Importance and Applicability

Impersonal accounts are vital for:

• Accurate financial reporting.
• Maintaining detailed records of assets, liabilities, expenses, and revenues.
• Assisting in the preparation of financial statements.
• Ensuring compliance with accounting standards.

Examples

• Nominal Account Example: Advertising Expense Account
• Real Account Example: Equipment Account

Considerations

• Regularly update and reconcile impersonal accounts.
• Ensure all transactions are properly classified.
• Understand the impact of each account on the financial statements.

Related Terms

• Personal Account: Accounts that relate to individuals or organizations.
• General Ledger: A complete record of all financial transactions over the life of the organization.

Comparisons

• Personal vs. Impersonal Accounts: Personal accounts are linked to individuals or organizations, while impersonal accounts are not.
• Nominal vs. Real Accounts: Nominal accounts are temporary and reset each accounting period, whereas real accounts are permanent.

Interesting Facts

• The double-entry bookkeeping system forms the foundation of modern accounting practices.
• Impersonal accounts help businesses evaluate their financial performance efficiently.

Inspirational Stories

The use of impersonal accounts has enabled many businesses to thrive by providing a clear picture of their financial health, aiding in strategic decision-making and long-term planning.

Famous Quotes

“Accounting does not make corporate earnings or balance sheets more volatile. Accounting just increases the transparency of volatility in earnings.” - Diane Garnick

Proverbs and Clichés

• “A penny saved is a penny earned.”
• “Money makes the world go round.”

Expressions, Jargon, and Slang

• Write-Off: An accounting action that reduces the value of an asset.
• Bookkeeping: The process of recording financial transactions.

FAQs

What is an impersonal account in accounting?

An impersonal account is a ledger account that does not bear the name of a person, such as nominal accounts or real accounts.

How are nominal and real accounts different?

Nominal accounts are temporary accounts that track expenses and incomes, reset each accounting period, while real accounts are permanent and track assets and liabilities.

References

• Pacioli, L. (1494). Summa de arithmetica, geometria, proportioni et proportionalità.
• International Financial Reporting Standards (IFRS).

Summary

Impersonal accounts, encompassing nominal and real accounts, play a crucial role in accounting by categorizing non-personal financial transactions. Understanding these accounts is essential for accurate financial reporting and strategic business planning. Whether tracking expenses, managing assets, or preparing financial statements, impersonal accounts provide the necessary framework for efficient and effective financial management.