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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 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).

Similarly expenses during the financial period are recorded using the respective
Expense accounts, which are also transferred to the revenue statement account. 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.

Based on periodicity of flow

The classification of accounts into real, personal and nominal is based on their nature
i.e. physical asset, liability, juristic entity or financial transaction. The further classification of
accounts is based on the periodicity of their inflows or outflows in the context of the fiscal
year.

Income

Income is immediate inflow during the fiscal year.

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, an asset
could be valued at the present value of its future inflows.

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Liability

Liability is long term outflow with implications extending beyond the financial period
and by the traditional view could represent unamortised expense. Alternatively, a liability
could be valued at the present value of future outflows.

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, also known as the elements of
the accounts: Asset, Liability, Equity, Revenue, Expense. The classification of Equity as a
distinctive element for classification of accounts is disputable on account of the "Entity
concept", 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.

CLASSIFICATION OF ACCOUNTING PROCESS

It is necessary to know the classification of accounts and their treatment in double

entry system of accounts. Broadly, 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, Artificial Personal Account and Representative Personal

Account.

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Natural Personal Account

An account related to any individual like David, George, Ram, or Shyam is called as a
Natural Personal Account.

Artificial Personal Account

An account related to any artificial person like M/s ABC Ltd, M/s General Trading,
M/s Reliance Industries, etc., is called as an Artificial Personal Account.

Representative Personal Account

Representative personal account represents a group of account. If there are a number

of accounts of similar nature, it is better to group them like salary payable account, rent
payable account, insurance prepaid account, interest receivable account, capital account and
drawing account, etc.

Real Accounts

Every Business has some assets and every asset has an account. Thus, asset account is
called a real account. There are two type of assets:

Tangible assets are touchable assets such as plant, machinery, furniture, stock,
cash, etc.
Intangible assets are non-touchable assets such as goodwill, patent, copyrights,
etc.

Accounting treatment for both type of assets is same.

Nominal Accounts

Since this account does not represent any tangible asset, it is called nominal or
fictitious account. All kinds of expense account, loss account, gain account or income
accounts come under the category of nominal account. For example, rent account, salary
account, electricity expenses account, interest income account, etc.

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CONCLUSION

The first step to recording your company's financial transactions is creating a chart of
accounts. This is a list of accounts you will use to classify financial transactions. Each
account you create is either an asset, liability, equity, expense or revenue account. Select the
type of account based on what the account is for. For example, classify a bank account as an
asset because a bank account holds the company's cash. Assets are what the business owns.
Classify a supplies account as an expense because you spend money on supplies to run the
business.

REFERENCES

https://en.wikipedia.org/wiki/Account_%28accountancy%29
http://www.studylecturenotes.com/accounting-finance/classification-of-accounts-
personal-real-nominal-accounts
https://www.tutorialspoint.com/accounting_basics/accounting_classification_of_a
ccounts.htm
http://smallbusiness.chron.com/bookkeeping-classification-accounts-55421.html
http://accountlearning.blogspot.in/2010/06/accounting-process-or-cycle-and-
its.html