CLASSIFICATION OF ACCOUNTS

Accounts are classified using two approaches – traditional approach (also known as British approach) and modern approach (also known as American approach). On this page, we shall briefly discuss the classification of accounts under both the approaches.
Classification Of Accounts Under Traditional Or British Approach




Classification Of Accounts Under Modern Or American Approach

The modern approach has become a standard of classifying accounts in many advanced countries. The types of accounts under this approach are mostly self-explanatory.


Under modern/American approach, the accounts are classified into the following five groups:


Asset accounts:Examples are land account, machinery account, accounts receivable account, prepaid rent account, cash account etc.

Liability accounts:Examples are loan account, accounts payable account, wages payable account, salaries payable account, rent payable etc.

Revenue accounts:Examples are sales account, service revenue account, rent revenue account, interest revenue account etc.

Expense accounts:Examples are wages expense account, commission expense account, salaries expense account, rent expense account etc.

Capital/owner’s equity accounts:Examples are John’s capital account etc.




Balancing accounts at the end of the accounting period

☺Personal, real and property accounts

To balance these accounts at the end of the accounting period (month, half yearly, yearly), the difference is described as ‘balance c/d’ (c/d standing for ‘carried down’). The same amount must be brought down to the opposite side as ‘balance b/d’ (b/d standing for brought down). This is the opening balance for the following accounting period.

☺Nominal accounts are closed but their balances are not brought down to the next accounting period like real and personal accounts. Their balances belong only to the current period and will affect the profit or loss for that period alone.

☺Accounts like purchases, sales, returns inwards, returns outwards, carriage inwards, expenses on purchases (duty, insurance on purchases) affect the gross profit and so must be transferred to the trading account for the calculation of gross profit.

☺ Expenses like transport, insurance, stationery etc affect the net profit. Hence it must be transferred to the profit and loss account for the calculation of net profit.