Clarity on the Classification of Account

classification in accounting

The businesses usually maintain separate accounts for revenues and all incomes earned by them. Examples of some real accounts are machinery account, land account, furniture account, cash account, bank accounts, debtors account, creditors account and capital account. You see that they are mostly on the balance sheet and are also called balance sheet accounts.

classification in accounting

Withdrawals are cash or assets taken by a business owner for his personal use. In sole proprietorship and partnership, an account titled as drawings account is used to account for all withdrawals. In corporate form of business withdrawals are more systematic and usually termed as distributions to stockholders. The account used for recording such distributions is known as dividend account. Examples of such accounts include machinery accounts, land accounts, furniture accounts, cash accounts, and accounts payable accounts. A separate ledger account for each tangible and intangible asset is maintained by the business to record any increase or decrease in that asset.

I. Classification of accounts

Companies that keep fixed assets in their books at their original cost also keep an account for accumulated depreciation for each fixed asset. The balance in the accumulated depreciation account is subtracted from the asset’s initial cost to reflect it at its book value or carrying value on the balance sheet. Allowance for doubtful accounts is another example of a valuation account. The allowance for doubtful accounts balance is deducted from total receivables in the balance sheet to report them at their net realizable value or carrying value. Valuation account (also known as contra account) is an account which is used to report the carrying value of an asset or liability in the balance sheet. A popular example of valuation account is the accumulated depreciation account.

For example, classify a bank account as an asset because a bank account holds the company’s cash. Classify a supplies account as an expense because you spend money on supplies to run the business. Real accounts are accounts that relate to a company’s assets or properties (both tangible and intangible). To account for increases and declines in the value of each asset, a separate account is kept. Cash account, inventory account, investment account, plant account, building account, goodwill account, patent account, copyright account, and so on are examples of real accounts.

What is the difference between a personal and an impersonal accounts?

The balance sheet transactions are divided into five classes of accounts qualified as balance sheet accounts and structured as follows. The modern approach has become a standard for classifying accounts in many developed countries. For the next accounting period, these accounts start with a non-zero balance, which is carried forward from the previous accounting period.

Companies maintaining fixed assets in the books of accounts at their original cost also maintain an accumulated depreciation account for each fixed asset. In balance sheet, the balance in the accumulated depreciation account is deducted from the original cost of the asset to report it at its book value or carrying value. Another example of valuation account is allowance for doubtful accounts. In balance sheet, the balance in allowance for doubtful accounts is deducted from the total receivables to report them at their net realizable value or carrying value.

  • Normally, nominal accounts are used to accumulate income and expense data.
  • These accounts do not disappear after the closure of the accounting period, but they continue to exist, which means they are carried forward to the next accounting period.
  • Most small businesses run a balance sheet at the end of each fiscal year after closing their income statement accounts.
  • However, in accounting and finance, the term is also used to denote all inflows of cash resulted by those activities that are not primary revenue generating activities of the business.

These accounts are not carried forward to the next accounting period. In the new accounting period, these accounts start with no balance brought forward, they start with a zero balance. All expense accounts are only for that accounting period and same goes for the revenue or income made. The income statement transactions are divided into 2 classes of accounts qualified as profit and loss accounts and structured as follows. In sole proprietorship, a single capital account titled as owner’s capital account or simply capital account is used.

Why is classification of accounts important?

Every transaction has to be recorded and its effect is taken in its individual expense or asset account and it is also recorded in the cash or bank account. A personal account is a general ledger account that is linked to all persons or people, such as individuals, businesses, or organizations. A nominal account is a general ledger account that tracks all revenue and spending, as well as profits and losses. Liabilities are obligations or debts payable to outsiders or creditors.

In partnership or firm, each partner has a separate capital account like John’s capital account, Peter’s capital account etc. In corporate form of business there are many owners known as stockholders or shareholders and the title capital stock account is used to record any change in the capital. Examples of nominal accounts include sales, purchases, gains on asset sales, wages paid, and rent paid. Usually, real accounts are listed in the balance sheet of the business. For this reason, they are sometimes referred to as balance sheet accounts.

Classification of Account

For example, a merchandising company may have some investment in an oil company. Any dividend received from oil company would be termed as dividend income rather than dividend revenue. Other examples of income include interest income, rent income and commission income etc.

The title of a liability account usually ends with the word “payable”. Examples include accounts payable, bills payable, wages payable, interest payable, rent payable and loan payable etc. Besides these, any revenue received in advance is also a liability of the business and is known as unearned revenue. For example, a marketing firm may receive marketing fee from its client for the forthcoming quarter in advance.

Accounting – Classification of Accounts

A personal account is created and used for the personal needs of a single person, and an impersonal account can be shared with other people. Class 8 is used to meet the disclosure requirements of financial statements. An account related to any individual like David, George, Ram, or Shyam is

called as a Natural Personal Account. Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including Entrepreneur, Business Insider, Investopedia, Forbes, CNBC, and many others.