We can classify accounts in two
different ways. These are:
-
Traditional classification
of accounts
-
Modern 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:
-
Personal accounts
-
Real accounts
-
Nominal accounts
-
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:
-
Plant and machinery
-
Purchases
-
Investment
-
Bank
-
Provision
for bad and doubtful debt
-
Tata Iron &
steel Co.
-
Rent
-
Land and Building
-
Carriage outward
-
Capital
-
Leasehold
-
Trademark
-
Return outwards
-
Import duty
-
Provision for
depreciation
Solution:
-
Real account
-
Nominal account
-
Real account
-
Personal account
-
Valuation account
-
Personal account
-
Nominal account
-
Real account
-
Nominal account
-
Personal account
-
Real account
-
Real account
-
Nominal account
-
Nominal account
-
Valuation account
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 |
|