Classification of Accounting
We can classify the financial accounts under two types of accounts,
one is the Traditional Approach and another one is the Modern
Approach. Let us deal here with the traditional approach.
Classification and Types of Accounts
We record business transactions in accounts. Thus, an account is an
individual and a formal record of a person, firm, company, asset,
liability, goods, incomes and expenses. We need to prepare one
account for each type of asset, liability, income or expense.
Hence, we record all the transactions related to a particular item in its
account. For example, all-cash transactions whether receipts or
payments will be recorded in the Cash A/c. After this, we will
calculate the balance of Cash A/c.
However, here the classification of accounts is important. We can
classify the accounts as per the traditional classification under the
following heads:
I. Personal Accounts
We further classify these as:
1. Natural Personal Accounts
2. Artificial Personal Accounts
3. Representative Personal Accounts
Let us study these accounts in detail.
1. Natural Personal Accounts: Natural Persons are human beings.
Therefore, we include the accounts belonging to them under this
head. For instance, Debtors, Creditors, Capital A/c, Drawings A/c,
etc.
2. Artificial Personal Accounts: Artificial persons are not human
beings but can act and work like humans. They have a separate
identity in the eyes of law and are capable to enter into agreements.
These include H.U.F, partnership firms, insurance companies, co-
operative societies, companies, municipal corporations, hospitals,
banks, government bodies, etc. For example, Bank of Baroda,
Oriental Insurance Co,
3. Representative Personal Accounts: These accounts represent the
accounts of natural or artificial persons. When the expenses
become outstanding or pre-paid and incomes become accrued or
unearned, they fall under this category. For example, Outstanding
Salary A/c, Pre-paid Rent A/c, Accrued Interest A/c, Unearned
Brokerage A/c, etc.
Accounting as an Information System
II. Impersonal Accounts
Impersonal Accounts are further classified as:
1. Real Accounts
2. Nominal Accounts
Let us now understand these accounts in detail.
1. Real Accounts: These are the accounts of all the assets
and liabilities of the organization. We do not close these accounts
at the end of the accounting year and appear in the Balance Sheet.
Thus, we carry forward the balances of these accounts to the next
accounting year. Therefore, we can also say that these are
permanent accounts. We can further classify these into:
2. Tangible Real Account: It consists of assets, properties or
possessions that can be touched, seen and measured. For example,
Plant A/c, Furniture and Fixtures A/c, Cash A/c, etc.
3. Intangible Real Account: It consists of assets or possessions that
cannot be touched, seen and measured but possess a monetary
value and thus can be purchased and sold also. For example,
Goodwill, Patents, Copyrights, etc.
4. Nominal Accounts: Nominal Accounts are the accounts relating to
the expenses, losses, incomes, and gains. These are temporary
accounts and thus we need to transfer their balances to Trading and
Profit and Loss A/c at the end of the accounting year. Therefore,
these accounts have no balance to be carried forward next year as
they are closed.
Rules for Debit and Credit for all types of accounts:
Personal Account:
Debit the Receiver
Credit the Giver
Real Account:
Debit what comes in
Credit what goes out
Nominal Account:
Debit all expenses and losses
Credit all incomes and gains
Representative Personal Account:
Debit the Debtor
Credit the Creditor
Merits and Demerits of Accounting
Solved Example on Types of Accounts
Analyze the following transactions and state the types of accounts
that need to be debited and credited.
1. Suryani commenced business with cash ₹ 1, 00,000.
2. Purchased machinery for cash ₹ 10,000
3. Purchased goods from Romil on credit ₹ 50,000
4. Sold goods for cash ₹ 10000
5. Paid wages to Jaimin ₹ 15,000
6. Paid to Romil ₹ 25000
7. Wages to be paid to Raj is outstanding ₹ 5000
8. Brokerage earned but not received ₹ 2000
9. Deposited ₹ 15000 into the bank.
10. Suryani withdrew cash for personal use ₹ 10000
Ans:
Analysis of transactions
Transacti Nature of Reason for Effect on Debited or
Accounts
on Accounts Accounts Credited
Cash A/c Real A/c Cash is coming
1. Debit Credit
Capital A/c Personal A/c in Suryani is the giver
Machinery Real
Machinery is coming
2. A/c Cash A/c Real Debit Credit
in Cash is going out
A/c A/c
Purchases
Real A/c Goods are coming
3. A/c Romil’s Debit Credit
Personal A/c in Romil is the giver
A/c
Cash Real Cash is coming
4. A/c Sales A/c Real in Goods are going Debit Credit
A/c A/c out
Wages are an
Wages A/c Nominal A/c
5. expense Cash is going Debit Credit
Cash A/c Real A/c
out
Romil is the
Romil’s A/c Personal A/c
6. receiver Cash is going Debit Credit
Cash A/c Real A/c
out
Wages A/c Nominal A/c Wages is an
Wages Representati expense Wages is
7. Debit Credit
Outstanding ve Personal payable to Raj and thus he is
A/c A/c our creditor.
Accrued
Representati Brokerage is receivable from
Brokerage
ve Personal the client, so the client is our
8. A/c Debit Credit
A/c Nominal debtor Broker
Brokerage
A/c age is an income
A/c
Bank Personal The bank is receiving the
9. A/c Ca A/c Real amount Debit Credit
sh A/c A/c Cash is going out
Drawings Personal Suryani is the
Debit Cre
10. A/c Cash A/c Real receiver Cash is
dit
A/c A/c going out
Solved Example on Accounting Equation
Analyze the following transactions under the Accounting
Equation Approach.
1. Commenced business with cash ₹500000
2. Purchased goods ₹25000
3. Paid salary ₹10000
4. Sold goods costing ₹20000 at a profit of 25% on the cost
5. Paid salary in advance ₹2000
6. Introduced additional capital ₹10000
7. Purchased computer ₹15000
8. Deposited ₹50000 into the bank
Ans.
Analysis of transactions:
1. It increases the Cash thus, add to cash. Also, it increases
the Capital, hence add to Capital.
2. Goods are purchased thus, cash is decreasing. While, goods are
coming in thus, they are increasing. Therefore, deduct cash and
add goods.
3. Salary is paid therefore cash is decreasing. While salary is an
expense. Thus, deduct cash and also deduct from Capital.
4. Goods are going out thus, deduct them. Thus cash is coming in,
add it. Also, add the profit to Capital.
5. Salary is paid in advance which is a current asset. Deduct Cash is
and add salary paid in advance.
6. Cash and Capital both are increasing. Hence, add Cash and
Capital.
7. Cash is decreasing while the computer is increasing. Therefore,
deduct cash and add to the computer.
8. Cash is decreasing and bank balance is increasing. Therefore,
deduct cash and add to the bank.
Summary of transactions using the Accounting
Equation
ASSETS LI
Bank
Total
Pre-paid
Cash Stock Computer
Salary
Ca
1. 500000 500000 50
2. (25000) 475000 25000 25000 500000 50
3. (10000) 465000 25000 490000 (1
4. 25000 490000 (20000) 5000 495000 50
5. (2000) 488000 5000 2000 2000 495000 4
6. 10000 498000 5000 2000 505000 5
7. (15000) 483000 5000 15000 2000 505000 5
8. (50000) 433000 5000 15000 2000 50000 505000
Example
From the following transactions identify the accounts involved and classify them
according to modern and traditional approaches of classification of accounts:
1. Mr. John started business with cash $25,000
2. Purchased goods for cash $5,000
3. Sold goods for cash $7,500
4. Purchased goods for cash $2,500
5. Sold goods to Sam on account $3,000
6. Purchased furniture for $1,000
7. Purchased machinery for $5,000
8. Paid wages $200
9. Mr. John withdrew $100 from business to pay his personal expenses.
Solution:
Extra
Example:
The following transactions are related to Small Traders:
1. Started business with cash $95,000.
2. Furniture purchased for cash to be used in business $8,000.
3. Purchased goods for cash $40,000.
4. Purchased goods on credit from Big Traders $57,000.
5. Sold goods for cash $5,000.
6. Purchased equipment for business $4,000.
7. Sold goods on credit to John Retailers $1,500.
8. Paid salary to employees $1,200
Required: Identify the accounts involved in above transactions and state the nature of
each account. Also mention how increases or decreases in accounts resulting from
above transactions should be recorded.
Solution:
