In the last lesson, the meaning of accounting was evaluated. We discovered that the term account is different from accounting. In this lesson, the traditional classification of accounts is examined. This is done with respect to how ledger books work. However, note that the use of computer base assisted accounting technology had changed the way accountants classify accounts. This is referred to as charts of accounts.
Classification of accounts
Accounts can be classified into two major divisions. Personal and impersonal accounts.
Personal Accounts: These are accounts for names of individuals and corporate entities. If you can identify an individual or corporate person in a business transaction, then it is a personal account.
Example of personal accounts is a cash account, bank account (e.g Zenith bank a/c), drawings account, capital account, name of persons and businesses that are debtors or creditors.
Impersonal accounts: These are accounts of non-persons. It is also referred to as accounts other than personal accounts. Therefore, any accounts that are not referred to as personal accounts are impersonal.
Impersonal accounts are further divided into real accounts, nominal accounts, and intangible accounts.
Real accounts are accounts that can be touched and seen. Fixed assets are generally cited as real accounts. These assets have the features of a real account. Examples of such accounts are motor vehicle accounts, fixtures and fittings, plants and machinery, buildings, investments and so on.
Intangibles accounts are accounts that can not be seen and touch. It is the direct contrary to real accounts. Most intangibles are non-current accounts. A popular example is the Goodwill accounts.
Nominal accounts, on the other hand, are accounts other than real and intangibles. The term nominal means general accounts. So, any other accounts that didn’t fit the classification for personal, real and intangibles accounts are separated into general accounts.
Nominal accounts are further divided into income accounts, expenses accounts, and internal accounts.
Examples of income accounts are revenue account, gains account and commission received accounts. Expenses accounts are loss accounts, purchases accounts, rent accounts. Examples of internal accounts are depreciation and amortization accounts, bad debts (loss allowance).
The traditional method of classifying accounts had evolved. In the next lesson, the chart of accounts will be discussed. This explained the current classification style.