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CLASSIFICATION OF ACCOUNTS AND ACCOUNTING

PROCESS

INTRODUCTION

An account (in book-keeping) refers to assets, liabilities, income, expenses, and
equity, as represented by individual ledger pages, to which changes in value are
chronologically recorded with debit and credit entries. These entries, referred to as postings,
become part of a book of final entry or ledger. Examples of common financial accounts are
sales, accounts receivable, mortgages, loans, PP&E, common stock, sales, services, wages,
and payroll. A chart of accounts provides a listing of all financial accounts used by particular
business, organization, or government agency. The system of recording, verifying, and
reporting such information is called accounting. Practitioners of accounting are called
accountants.

CLASSIFICATION OF ACCOUNTS

Based on nature

An account may be classified as real, personal or as a nominal account

Type Represent Examples
Real Physically tangible things in the world Tangibles - Plant and Machinery,
and certain intangible things not Furniture and Fixtures, Computers and
having any physical existence Information Processing Equipment,Cash
Accounts etc. Intangibles -Goodwill,
Patents and Copyrights
Personal Business and Legal Entities,Bank Individuals, Partnership Firms, Corporate
Accounts entities, Non-Profit Organizations, any
local or statutory bodies including
governments at country, state or local
levels
Nominal Temporary Income and Expenditure Sales, Purchases, Electricity Charges
Accounts for recognition of the

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Income Income is immediate inflow during the fiscal year. an asset could be valued at the present value of its future inflows. juristic entity or financial transaction. liability. Similarly expenses during the financial period are recorded using the respective Expense accounts. The net positive or negative balance (profit or loss) of the revenue statement account is transferred to reserves or capital account as the case may be. 2 .e. which are also transferred to the revenue statement account. The further classification of accounts is based on the periodicity of their inflows or outflows in the context of the fiscal year. Based on periodicity of flow The classification of accounts into real. physical asset. personal and nominal is based on their nature i. Expense Expense is the immediate outflow during the fiscal year. Asset An asset is a long-term inflow with implications extending beyond the financial period and by the traditional view could represent unclaimed income. Alternatively. implications of the financial transactions during each fiscal year till finalisation of accounts at the end Example: A sales account is opened for recording the sales of goods or services and at the end of the financial period the total sales are transferred to the revenue statement account (Profit and Loss Account or Income and Expenditure Account).

Expense. also known as the elements of the accounts: Asset. the accounts are classified into three categories:  Personal accounts  Real accounts o Tangible accounts o Intangible accounts Personal Accounts Personal accounts may be further classified into three categories: Natural Personal Account. Liability. The classification of Equity as a distinctive element for classification of accounts is disputable on account of the "Entity concept". Broadly. 3 . Equity. Alternatively. Artificial Personal Account and Representative Personal Account.Liability Liability is long term outflow with implications extending beyond the financial period and by the traditional view could represent unamortised expense. Type of Long term Long term Short term Short term accounts inflows outflows inflows outflows Real accounts Assets Personal Assets Liability accounts Nominal Incomes Expenses accounts Items in accounts are classified into five broad groups. since for the objective analysis of the financial results of any entity the external liabilities of the entity should not be distinguished from any contribution by the shareholders. Revenue. CLASSIFICATION OF ACCOUNTING PROCESS It is necessary to know the classification of accounts and their treatment in double entry system of accounts. a liability could be valued at the present value of future outflows.

interest income account. Accounting treatment for both type of assets is same. capital account and drawing account.. insurance prepaid account. If there are a number of accounts of similar nature. Real Accounts Every Business has some assets and every asset has an account. etc. etc. electricity expenses account. or Shyam is called as a Natural Personal Account. it is better to group them like salary payable account. interest receivable account. Artificial Personal Account An account related to any artificial person like M/s ABC Ltd. gain account or income accounts come under the category of nominal account. Ram. Nominal Accounts Since this account does not represent any tangible asset. patent. rent payable account. M/s General Trading. stock. All kinds of expense account. Thus. cash. etc. machinery. salary account.Natural Personal Account An account related to any individual like David. etc. asset account is called a real account. George. loss account. Representative Personal Account Representative personal account represents a group of account. copyrights. rent account. it is called nominal or fictitious account. is called as an Artificial Personal Account. There are two type of assets:  Tangible assets are touchable assets such as plant. 4 . furniture. etc. For example.  Intangible assets are non-touchable assets such as goodwill. M/s Reliance Industries.

html  http://accountlearning.tutorialspoint. equity.in/2010/06/accounting-process-or-cycle-and- its.studylecturenotes.com/accounting-finance/classification-of-accounts- personal-real-nominal-accounts  https://www.org/wiki/Account_%28accountancy%29  http://www. REFERENCES  https://en. This is a list of accounts you will use to classify financial transactions.blogspot. classify a bank account as an asset because a bank account holds the company's cash. For example. Classify a supplies account as an expense because you spend money on supplies to run the business.com/bookkeeping-classification-accounts-55421. Each account you create is either an asset.htm  http://smallbusiness.chron.com/accounting_basics/accounting_classification_of_a ccounts. expense or revenue account.html 5 . liability.wikipedia. Select the type of account based on what the account is for. Assets are what the business owns.CONCLUSION The first step to recording your company's financial transactions is creating a chart of accounts.