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Classification of Accounts:

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We can classify accounts in two different ways. These are:

  1. Traditional classification of accounts

  2. Modern classification of accounts

Traditional Classification of Accounts:

This is very old method of classifying accounts and is not used in most of the advanced countries. Under this method, accounts are classified into four types. These are:

  1. Personal accounts
  2. Real accounts
  3. Nominal accounts
  4. Valuation accounts

These four types of accounts are briefly explained below:

Personal Accounts:

These accounts show the transactions with the customers, suppliers, money lenders, the bank and the owner. A business may have many credit transactions with the above persons or organizations. A separate account is to be prepared for each of them. Persons or organizations with whom the business has credit transactions are either debtors or creditors. If they have to give some money to the firm, they are called debtors. Conversely, if the firm is to pay them some money they are known as creditors. The main purpose of preparing personal accounts is to ascertain the balances due to or due from persons or organizations.

Real Accounts:

These accounts are accounts of assets and properties such as land, building, plant, machinery, patent, cash, investment, inventory, etc. When a machinery is purchased for cash, the two accounts involved are machinery and cash - both are real accounts. But if the same machine is purchased from Z & Co. on credit, the two accounts involved will be those of machinery and Z & Co., the former being a real account and the later being a personal account.

Nominal Accounts:

These are the accounts of incomes, expenses, gains and losses. Examples of nominal accounts are wages paid, discount allowed or received, purchases, sales, etc. These accounts generally accumulate the data required for the preparation of income statement or trading and profit and loss account.

Valuation Accounts:

These are the accounts of provision for depreciation and provision for doubtful debts. Where fixed assets are maintained in the books of accounts at original cost, to reflect the actual book value of the assets, a provision for depreciation account on the credit is maintained. In the balance sheet, it is shown as deduction from the original cost of the asset. Similarly, if the debtors' personal accounts are retained at total amount due, a valuation account on the credit - provision for doubtful debts is required. In the balance sheet, it is shown as a reduction from sundry debtors account to reflect estimated realizable value.

Example:

Classify the following into real, nominal, personal and valuation accounts:

  1. Plant and machinery

  2. Purchases

  3. Investment

  4. Bank

  5. Provision for bad and doubtful debt

  6. Tata Iron & steel Co.

  7. Rent

  8. Land and Building

  9. Carriage outward

  10. Capital

  11. Leasehold

  12. Trademark

  13. Return outwards

  14. Import duty

  15. Provision for depreciation

Solution:

  1. Real account

  2. Nominal account

  3. Real account

  4. Personal account

  5. Valuation account

  6. Personal account

  7. Nominal account

  8. Real account

  9. Nominal account

  10. Personal account

  11. Real account

  12. Real account

  13. Nominal account

  14. Nominal account

  15. Valuation account

Modern Classification Of Accounts:

Modern accountants classify accounts as follows:

ACCOUNTS

1 2 3 4 5 6
Assets
Account
Liabilities
Account
Capital
Account
Revenue
Account
Expenditure
Account
Withdrawal
Account
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More study material from this topic:

Classification of accounts
Rules of debits and credits
Journal
Ledger
Trial balance
Questions and answers

 

A D V E R T I S E M E N T

 

Financial Accounting Topics


  Introduction to Accounting
 ----------------------------------------------------------------------------
  Transactions and Accounting Equation
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  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Accounting for Bills of Exchange
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Final Accounts
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  Work Sheet
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  Capital and Revenue Items
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  Valuation of Inventories
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  Accounts of Non-profit Making Organizations
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  Statement of Cash Flows
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  Accounting Ratios Analysis
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  Depreciation, Provisions and Reserves
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  Accounting Dictionary
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  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
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  Cost Volume Profit Relationship
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  Variable Costing System
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  Materials and Inventory Cost Control
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  Activity Based Costing System
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  Standard Costing and Variance Analysis
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  Balanced Scorecard
----------------------------------------------------------------------------
  Capital Investment Analysis/Capital Budgeting
 

 

 

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