Accounts are classified in accounting using one of two methods: the current approach or the classic approach. We’ll start with the modern technique because it’s the method of account classification utilized in practically every advanced country. Traditional approaches are rarely used, and they will be described later. The accounts are classified as asset accounts, liability accounts, capital or owner’s equity accounts, withdrawal accounts, revenue/income accounts, and expense accounts, according to the modern approach. Personal accounts, real accounts, nominal accounts, and valuation accounts are the four types of accounts described by the traditional approach. Below is a quick explanation of each.
Types of Account
A general ledger account that deals with assets and liabilities other than individual’s accounts is known as a Real Account. These are accounts that are not required to be closed at the close of the financial year because they are carried forward to the following year. A bank account is a simple example of a real account.
A personal account is a general ledger account that is linked to all persons or people, such as individuals, businesses, or organizations. A personal account could be a creditor account. A nominal account is a general ledger account that tracks all revenue and spending, as well as profits and losses. An interest account is a simple example of a nominal account.
Personal Account
Personal accounts are accounts that are linked to real people and organizations. John’s account, Peter’s account, Procter & Gamble’s account, Vibrant Marketing Agency’s account, City bank’s account, and so on are examples of personal accounts. For the purpose of determining the amount due from or owed to each individual and organization, the business keeps a separate account for them.
Types of Personal Account
Natural Person
Individuals or natural persons are associated with these types of accounts, such as Ranveer’s A/c, Aryan’s A/c, Ritwik’s A/c, and so on.
Artificial Account
These accounts are linked to a variety of businesses and organizations, including Roy Brothers Pvt Ltd A/c, Lion’s Club A/c, and others. As a result, such institutions and businesses are those that exist in the eyes of the law.
Representative Account
Representative accounts are accounts that represent a specific type of work. Outstanding Wages Accounts, Outstanding Interest Accounts, Prepaid Expense Accounts, and so on.
Real Account
Real accounts are accounts that relate to a company’s assets or properties (both tangible and intangible). To account for increases and declines in the value of each asset, a separate account is kept. Cash account, inventory account, investment account, plant account, building account, goodwill account, patent account, copyright account, and so on are examples of real accounts.
Types of Real Account
Tangible Account
Accounts that are physical in nature are referred to as tangible actual accounts. To put it another way, these advantages are visible to the naked eye. These assets can be felt, seen, and touched. For example, a/c in a building, a/c in a vehicle, a/c in machinery, and so on.
Intangible Account
Accounts that deal with non-physical assets or things are referred to as this type of account. In other words, these assets cannot be seen, felt, or touched, yet they can be evaluated in financial terms. These assets can be said to have some value associated with them. For instance, goodwill, patents, trademarks, and copyrights are all examples.
Nominal Accounts
Nominal accounts are accounts that deal with incomes, gains, expenses, and losses. These accounts are typically used to collect data for the purpose of creating a business’s income statement or profit and loss account for a specific time. Sales account, purchases account, wages account, salaries account, interest account, rent account, gain on sale of fixed assets account, loss on sale of fixed assets account, and so on are examples of nominal accounts.
Valuation Account
A valuation account is a balance sheet account that is used to report the carrying value of an asset or liability. The accumulated depreciation account is a common example of a valuation account. Companies that keep fixed assets in their books at their original cost also keep an account for accumulated depreciation for each fixed asset. The balance in the accumulated depreciation account is subtracted from the asset’s initial cost to reflect it at its book value or carrying value on the balance sheet. Allowance for doubtful accounts is another example of a valuation account. The allowance for doubtful accounts balance is deducted from total receivables in the balance sheet to report them at their net realizable value or carrying value.
Conclusion
Accounts are classified in accounting using one of two methods: the current approach or the classic approach. The accounts are classified as asset accounts, liability accounts, capital or owner’s equity accounts, withdrawal accounts, revenue/income accounts, and expense accounts, according to the modern approach. Personal accounts, real accounts, nominal accounts, and valuation accounts are the four types of accounts described by the traditional approach. Below is a quick explanation of each. Personal accounts are accounts that are linked to real people and organizations. John’s account, Peter’s account, Procter & Gamble’s account, Vibrant Marketing Agency’s account, City bank’s account, and so on are examples of personal accounts.
