An account is a summarised form of all the transactions relating to a particular head at one place in chronological order. An account not only records the amount of the transaction but also its effect and direction. After going through this lesson you will understand the Classification of Accounts.
Classification of Accounts
Accounts are classified on two bases:
- Traditional Classification of Accounts
- Modern Classification of Accounts
Traditional Classification of Accounts
This is an old method of classifying accounts. Under this method, accounts are classified into three types. These are
- Personal Accounts
- Real Accounts
- Nominal Accounts
Personal Accounts are those accounts that relate to persons such as individuals (like Ram, Mohan, Sohan, etc),
firms (like XYZ & Co., Ajit Ram, and Brothers, etc), companies (like XYZ Ltd, ABC Ltd, etc), debtors (name of debtors),
creditors (name of creditors), capital account of proprietor or drawings account of the proprietor, etc. There are three categories of Personal Accounts.
- Natural Person Account: It refers to accounts of living human beings such as Rohit’s Account, Lata’s Account, etc.
- Artificial Person Account: It refers to accounts of companies or firms that act as a person in the business transactions. For example, ABC Ltd Account, XYZ Ltd Account.
- Representative Personal Account: It refers to an account that acts as a representative of a certain person. For example, Salary Outstanding Account represents salary payable to employees and Rent Outstanding Account represents rent payable to the landlord.
Real Accounts are those accounts that relate to tangible or intangible real assets. Tangible assets are the assets
that have physical existence or in simple words assets that can be seen and touched, such as Land, Building, Machinery, Furniture, etc. On the opposite hand, intangible assets are the assets that don’t have any physical existence like Patents, Copyright, Goodwill, etc.
Nominal Accounts are the accounts that are related to expenses (such as purchases, interest paid, salaries, etc), incomes (such as interest received, the commission received, etc), losses (loss by fire, loss by theft), or gains (gain on sale of assets), etc.
Modern Classification of Accounts
Under modern classification, accounts are classified into five main categories. These are:
- Assets Accounts
- Liabilities Accounts
- Capital Accounts
- Revenue Accounts
- Expenses Accounts
Assets Accounts: These accounts relate to tangible and intangible real assets. Its examples are Land A/c, Machinery A/c, Furniture A/c, Cash A/c, Patents A/c, etc.
Liabilities Accounts: These accounts are associated with the financial obligations of an enterprise towards outsiders. Its examples are Creditors, Loan, Bank Overdraft, etc
Capital Accounts: These accounts include accounts of the proprietor of an organization such as Capital A/c, Drawings A/c, etc. These are related to the owners of an enterprise.
Revenue Accounts: These accounts include accounts related to the amount received or receivable on goods sold, services rendered or other incomes such as Interest received A/c, Commission received A/c, Royalty received A/c, Dividend received A/c, etc.
Expenses Accounts: These accounts include accounts related to the amount incurred or lost in the process of earning revenue. Its examples are Purchases A/c, Discount Allowed A/c, Salaries A/c, Interest paid A/c, etc.
YOU MAY READ
accounting information is often defined as data and facts produced or revealed by the financial statements of a business. This information is usually available within the sort of financial statements, financial reports, etc.