Account and Classification of Accounts

What is Account?

Account is a record of general ledger that is used to collect and record the debit and credit the amounts. In single line we can say the statement of an individual or a company where income expenses are shown and profit and loss is shown. For example: transaction related to individual expenses and income in form of cash and banks. 

Classification of Accounts:

An account is the primary building block of the accounting system of a business. A different account is maintained for each asset, liabilities, and owner’s capital revenue and expenses items. It is used to document to increase and decrease in these items those results from financial transactions. The financial transaction can be divided into 3 categories as listed below:-

1 Transaction related to individuals

2 Transaction related to property and assets

3 Transaction related to income and expenses.

These transaction need to be documented to find out whether the amount is credited or debited .A transaction record of an individual or an organization is known as an account. To put it differently, an account is a concise record of significant financial transaction. For each of the assets, liabilities, owner’s capital, revenue and expenses items, a separate account is maintained.

Account is categories in three parts:

Personal account: It indicates the account of an organization or an individual. These accounts document the transaction of a trader with person or organization. Each individual or organization starts a separate account for documenting transaction. This account get debited the individual or organization receives any benefits while it is credited the individual or organization lends some money or with any type of cash outflow. Personal account can be of following types:-

Natural persons account: Natural person means the document transaction connected to a person or individual direcly. For example: Rahul’s account, Kavita’s account etc.

Artificial person accounts: That record transactions that are connected to entities such as companies, institution, bank and firm. For example: State bank of India Account, M/s Ram and Bros. Account, etc.

Representative Account: Indicates account that represents a particular person or a group of persons. For instance, if the salary is due to an employee of an organization, an outstanding salary account would be opened in this example the outstanding salaries account stands for the account of the particular employees to whom the salaries is to be paid.

Real Account: Implies accounts that document transaction that are connected to a property or an assets such as furniture, land house etc. Real accounts are also divided into 2 accounts:

Tangible account: Those have a physical existence that can be touched, seen, measured, bought and sold. For instance Land and Building account, Cash Account.

Intangible Account: That can’t be perceived by sense, but measured in terms of value such as goodwill, patent, trademarks, and copyrights such account like Goodwill account, Patent Account Royalty Account.

Nominal Account: Points to the account that document transaction connected to expenses, losses, profit and revenues. These accounts are closed at the end of accounting period. For Instance, Purchase account, Sales Account salary account, rent account, commission account, and discount account.