Accounting is a systematic way to record transactions. An account (in bookkeeping) 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 cash, 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.
Types of accounts
Based on nature
An account may be classified as real, personal or as a nominal account
|Real||Physically tangible things in the real world and certain intangible things not having any physical existence||Tangibles - Plant and Machinery, Furniture and Fixtures, Computers and Information Processing Equipment etc. Intangibles -Goodwill, Patents and Copyrights,Cash Accounts|
|Personal||Business and Legal Entities,Bank Accounts||Individuals, Partnership Firms, Corporate entities, Non-Profit Organizations, any local or statutory bodies including governments at country, state or local levels|
|Nominal||Temporary Income and Expenditure Accounts for recognition of the implications of the financial transactions during each fiscal year till finalisation of accounts at the end||Sales, Purchases, Electricity Charges|
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 is immediate inflow during the fiscal year.
Expense is the immediate outflow during the fiscal year.
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.
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 accounts||Long term inflows||Long term outflows||Short term inflows||Short term outflows|
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 Accounts : Free MBA Notes