Classifications of Accounts

An 'account' is a specific location for recording transactions of a like kind. The dual aspect of treating each transaction is then recorded in an account. An account shows us the 'history' of a particular business transaction.

Accounts can be divided into three categories:
  1. Personal Accounts – these are the accounts of your creditors (accounts payable) and debtors (accounts receivable)
  2. Real Accounts – are your tangible and intangible assets
  3. Nominal Accounts – these are income and expense accounts of your business

TypeRepresentExamples
PersonalAccounts related to individuals, firms, organizations, or companiesIndividuals; partnership firms; corporate entities; non-profit organizations; any local or statutory bodies including governments at the country, state or local levels
RealAccounts related to assets of a tangible or intangible nature
  • Tangibles – Plants and machinery, furniture and fixtures, computers and information processing equipment
  • Intangibles – Goodwill, patents, copyrights, trademarks
NominalTemporary income and expenditure accounts for recognition of the implications of financial transactions during each fiscal term till finalization of accounts at term endSales, purchases, utilities, dividends
Table 1.1
Accounts can be further divided into five types. The basic types of accounts are:
  1. 'Assets:' items of value that the business owns or has rights to. Examples include: cash, real estate, equipment, money or services that others owe you (accounts receivables), and even intangible items such as patents and copyrights.
  2. 'Liabilities:' obligations that are owed to other parties (accounts payables). Examples include: wages payable, taxes due, and borrowed money (also called debt).
  3. 'Equity:' the ownership value of a business. It is the investment by an owner in the business.
  4. 'Revenues:' the mechanisms where income enters the business (note that revenue and income is not the same thing--they are used here to describe each other in basic terms only. This will be explained later).
  5. 'Expenses:' the costs of doing business. Examples include: salary expense, rent, utilities expense, and interest on borrowed money.


We have now identified the different types of accounts for a business but do you know what a business is? Let’s explore this concept.

What is a Business?

A business can be defined as a commercial organisation, which exists with a view to making a profit. A business will generally fall into one of the following categories (depending on the country you are establishing the business):

Sole Trader - This is a business that is owned and operated by one person. He or she is solely liable for all business debts but when successful, takes all the profits.

Partnership - This type of business is owned by several individuals, some of which will actively be involved in the business.

Companies (or Public Corporations) - This type of business is owned by shareholders and is operated on their behalf by a nominated board of directors.

Non-Trading Organisations (or Non-Profit Corporations) - Clubs, associations and other non-profit-making organisations are normally run for the benefit of their members to engage in a particular activity and not to make a profit. Their financial statements will take the form of income and expenditure accounts.

Cooperative Society - A legally constituted business entity formed for the explicit purpose of furthering the economic welfare of its members and that of the wider society by providing them with goods or services.


Topic Summary



You just had your first insight of an operation of a business. You have distinguished between bookkeeping and accounting, management and financial accounting and you have also looked at the classification and types of accounts and forms of business entities.

2 comments:

  1. Its indeed a useful post with good information.
    accountants online london

    ReplyDelete
  2. Outsourcing bookkeeping is the process of hiring a third-party individual or firm to handle your bookkeeping tasks. This can be a great option for businesses of all sizes, but it is especially beneficial for small businesses that do not have the time or resources to manage their own bookkeeping in-house.

    ReplyDelete

Thank you for sharing.