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Thursday, February 18, 2010

Account Classification

Broadly Accounts are classified as
·         Personal - Related with the Persons E.g. Mr. Paul’s A/C account at ABC Org
·         Nominal - Pertaining to Income and Expenses E.g. Interest, Wages etc.
·         Real - Pertaining to things / Properties E.g. Cash, building, Machinery etc.
Further Accounts can be divided into below types

Assets are accounts that add value to your individual or business worth. 
Liabilities are accounts that remove value from your individual or business worth. 
Equity is used to identify the individual contribution of money, or other financial equivalent, invested in individual or business worth. 
Revenue account is simply the account that tracks all income generated
Expense accounts are the individual accounts setup to record the financial transactions that occur, as expenditure, in generating that income.

An example of an asset would be your car.  Your car has a dollar value attached to it.  It adds value to your individual worth.  An example of a liability would be your car loan.  The loan removes value from your individual worth.  The equity in your car would be any money you paid down toward the purchase.  If you use your car to operate a pizza delivery service, the income generated from delivering pizzas would be known as revenue.  Any expense for gas or car repairs would be recorded in an expense account known as “automotive expense”.
General Accounting Rules for Every Account

·         For Real A/C – Debit that whatever comes in, Credit whatever goes out.
·         For Nominal A/C– Debit expenses, losses and credit incomes and profits.
·         For Personal A/C- Debit the Receiver, Credit the Giver.

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