Your understanding is correct here.
Even though you can use personal account with Azure AD, it remains a personal account only and there are some limitations around it. You may need to use a work or school account instead.
Please find the difference between Work & School accounts (Organizational accounts) and Microsoft Accounts (Personal Accounts) for better understanding:
A work or school account is created by an organization using a business service that has Azure Active Directory as the authentication and authorization platform.. A work account typically uses an organization’s custom domain name or company name ie.(******@yourorg.com). These are created by an organization’s administrator to enable a member of the organization access to Microsoft cloud services such as Microsoft Azure, Microsoft Intune or Microsoft 365.
A Microsoft account (MSA) is an account created by a user for personal use and is the new name for what used to be called “Windows Live ID”. The Microsoft account is the combination of an email address and a password that a user uses to sign into all consumer-oriented Microsoft products and cloud services such as Outlook (Hotmail), Messenger, OneDrive, MSN or Xbox LIVE. Your Microsoft account is created and stored in the Microsoft consumer identity account system that is run by Microsoft.
I would suggest that to create work or school account (aka Organizational Accounts) to work in this case and creates a user in the AAD Tenant and once the user gets created, you will find that you have the userPrincipalName set as "******@yourTenantName.onmicrosoft.com" to access the O365 Exchange Online.
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