Classification of Accounts or Kinds of Accounts:
Before we consider the classification of accounts into different kinds, let us understand why accounts are classified into different kinds. Accounts are classified into different kinds for the following reasons:
(a) The debit and credit aspects of a transaction (i.e., the accounts to be debited and credited in a transaction) can be easily determined, if the accounts involved in the transaction are classified into different kinds according to their nature.
(b) The nature of the balance of an account can be understood easily, if the accounts involved in a transaction are classified into different classes according to their nature.
(c) Different accounts provide different kinds of information. For example, personal accounts provide information about the amounts due to the creditors or the amounts due from the debtors. Real accounts provide information about the values of the assets held by a business. Nominal accounts provide information about the amounts of various items of expenses and incomes. So, to get the various kinds of information, accounts are required to be classified into different kinds.
(d) Classification of accounts into different kinds helps a business to divide the ledger into different ledgers and maintain different types of accounts in different ledgers. This (i.e., the classification of accounts into different kinds and the maintenance of different classes of accounts in different ledgers) will help the business to locate an account easily.
It has already been stated that every transaction affects two accounts, and under the double-entry system of book-keeping, every transaction has to be recorded in two accounts. Before we see how each transaction is recorded in accounts, let us consider the various kinds of accounts.
Every business concern deals with other persons, firms or companies. For instance, a concern may buy goods from other parties or sell goods to other parties on credit. Again, it may borrow money from other parties or lend money to other parties.
Secondly, a business concern has certain properties or assets, such as goods, cash , furniture, buildings, etc. in which or with which the business is carried on.
Thirdly, it may incur certain expenses, such as salaries, rent, advertisement, stationery, etc., and may earn some incomes, such as commission, interest, etc. in the course of the business.
From the above discussion, it is clear that every business concern has three classes of transactions viz., (1) transactions relating to persons, (2) transactions relating to assets and (3) transactions relating to expenses and incomes. So, if a concern likes to keep a complete record all the transactions, it must must maintain accounts for all these three classes of transactions.
The accounts maintained by a business concern for these three classes of transactions may be divided into two broad classes, viz.,
1. Personal Accounts and
2. Impersonal Accounts.
The impersonal accounts may be sub-divided into two classes, viz.,
(1) Real Asset or Property Accounts and
(2) Nominal or Fictitious Accounts.
Therefore, there are three classes of accounts, viz.,
1. Personal Accounts
2. Real, Asset or Property Accounts and
3. Nominal or Fictitious Accounts.
Before we consider the classification of accounts into different kinds, let us understand why accounts are classified into different kinds. Accounts are classified into different kinds for the following reasons:
(a) The debit and credit aspects of a transaction (i.e., the accounts to be debited and credited in a transaction) can be easily determined, if the accounts involved in the transaction are classified into different kinds according to their nature.
(b) The nature of the balance of an account can be understood easily, if the accounts involved in a transaction are classified into different classes according to their nature.
(c) Different accounts provide different kinds of information. For example, personal accounts provide information about the amounts due to the creditors or the amounts due from the debtors. Real accounts provide information about the values of the assets held by a business. Nominal accounts provide information about the amounts of various items of expenses and incomes. So, to get the various kinds of information, accounts are required to be classified into different kinds.
(d) Classification of accounts into different kinds helps a business to divide the ledger into different ledgers and maintain different types of accounts in different ledgers. This (i.e., the classification of accounts into different kinds and the maintenance of different classes of accounts in different ledgers) will help the business to locate an account easily.
It has already been stated that every transaction affects two accounts, and under the double-entry system of book-keeping, every transaction has to be recorded in two accounts. Before we see how each transaction is recorded in accounts, let us consider the various kinds of accounts.
Every business concern deals with other persons, firms or companies. For instance, a concern may buy goods from other parties or sell goods to other parties on credit. Again, it may borrow money from other parties or lend money to other parties.
Secondly, a business concern has certain properties or assets, such as goods, cash , furniture, buildings, etc. in which or with which the business is carried on.
Thirdly, it may incur certain expenses, such as salaries, rent, advertisement, stationery, etc., and may earn some incomes, such as commission, interest, etc. in the course of the business.
From the above discussion, it is clear that every business concern has three classes of transactions viz., (1) transactions relating to persons, (2) transactions relating to assets and (3) transactions relating to expenses and incomes. So, if a concern likes to keep a complete record all the transactions, it must must maintain accounts for all these three classes of transactions.
The accounts maintained by a business concern for these three classes of transactions may be divided into two broad classes, viz.,
1. Personal Accounts and
2. Impersonal Accounts.
The impersonal accounts may be sub-divided into two classes, viz.,
(1) Real Asset or Property Accounts and
(2) Nominal or Fictitious Accounts.
Therefore, there are three classes of accounts, viz.,
1. Personal Accounts
2. Real, Asset or Property Accounts and
3. Nominal or Fictitious Accounts.
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