Classification of Accounts

 

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Classification of Accounts

Or

Types of Accounts

 

Meaning of Account

 

An account is a summarized record of transactions relating to a particular person, asset, liability, particular head of expense or income recorded at one place. In day to day business activity large number of business transactions takes place. It affects the several accounts. At the end of certain period of time, it is necessary for the businessman to balance the accounts to find out the information. like total capital, total liabilities and assets , total incomes and expenses etc. of the business.

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Definition of Account

 

“An account is summarized record of transactions affecting one person, one kind of property or one class of gain or loss.” – G.R.Batliboi

 

“An account is a ledger record in a summarized form of all the transactions that have taken place with the particular person or thing specified.” – Carter

 

Personal Accounts

 

This account represents a person and group of persons with whom business deals. These accounts are classified into following three categories:-

 

Natural Person's Account: Accounts relating to individual human beings. for e.g. Rajesh’s A/c, Sumit's A/c, Sushma's A/c, Vaibhav’s A/c etc.

 

Artificial Person's Account: Artificial persons means includes accounts of organizations, associations which are created by law, for E.g. Bank of Maharashtra A/c, ABC & Co A/c, Recreation Club A/c.

 

Representative Personal Account: These Accounts represent a certain person or group of person in business dealing. Accounts relating to outstanding and prepaid items are called representative personal account

 

E.g. Outstanding Rent A/c, Income received in advance A/c, Prepaid Wages A/c etc.

 

Impersonal Account

 

Impersonal Accounts are classified into following two categories;-

 

Real Accounts This account represents assets and properties owned by the business. The following are the types of Real Account.

 

Tangible Real Account: Tangible real account means the Assets and properties, which can be seen, touched and felt. e.g. Machinery A/c, Motor Car A/c, Stock of Goods A/c etc.

 

Intangible Real Account: Intangible Real account means assets which cannot be seen, touched, or felt but they can be measured in terms of money e.g. Goodwill A/c, Patents A/c, Trademark A/c, Copyright A/c etc.

 

Nominal Accounts: The account of expenses, losses, income and gains are called as Nominal accounts e.g. Wages A/c, Stationery A/c, Salary A/c, Depreciation A/c Commission Received A/c, Discount Received A/c etc.

 

Debit and Credit

 

Debit (Dr.): Left hand side of an Account is called Debit (Dr) side.

 

Credit (Cr): Right hand side of an Account is called Credit (Cr) side.

 

Golden Rules of Debit and Credit (Traditional Approach)

 

Classification of Accounts (Modern approach)

In the given chart different types of accounts have been summarized. All accounts are divided into five categories for the purpose of recording the transaction.

 

Namely –

1) Assets

2) Liabilities

3) Capital

4) Expenses/Losses

5) Revenues/Gains

 

Two fundamental rules to be followed to record the changes in these accounts:

 

For recording changes in Assets / Expenses / Losses.

 

I) Increase in asset is debited and decrease in asset is credited.

II) Increase in expenses/losses is debited and decrease in expenses/ losses is credited.

 

For recording changes in liabilities and capital / revenues / Gains.

 

I) Increase in liabilities is credited and decrease in liabilities is debited.

II) Increase in capital is credited and decrease in capital is debited.

III) Increase in revenues/gains is credited and decrease is revenue/gains is debited.

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Accounting Equations

Accounting equation signifies that assets of a business are always equal to the total of its liabilities and capital.

 

The equation is expressed as follows-

 

Assets = Liabilities + Capital

 

The fundamental equation gives the foundation to the Double Entry Book-keeping system.

Following are the equations-

 

Capital = Total Assets – Outsider’s Liabilities

Assets = Capital + Outsiders Liabilities

Assets = Liabilities

Example:-

Rahul started business with Cash 50,000.

The accounting equation will be-

Assets = Capital + Liabilities

Cash = Capital + Liabilities

50,000 = 50,000 + 0

50,000 = 50,000