CLASSIFICATION OF ACCOUNTS

WEEK SEVEN DATE ………………………

TOPIC: CLASSIFICATION OF ACCOUNTS

CONTENT

• Classification of Accounts
• Division of the Ledger
• The Trial Balance

An account is a ledger record, in a summarized form, of all transactions that have taken place with a particular person.

An account can also be defined as a history of all transactions of similar nature. It is usual to keep separate accounts for each class of asset, liability, income and expenses relating to a business.

Classification of Accounts

All accounts fall into one or two classes: personal accounts or impersonal accounts. Each of these classes can be further divided into subgroups as illustrated in the diagram that follows:

Accounts

Personal Accounts Impersonal Accounts

Debtors accounts Creditors accounts Real accounts Nominal accounts

1. Personal Accounts are the accounts that record all the transactions between the business and the persons (individuals, sole traders, other businesses and organisations) with whom the business has transactions.

The Subgroups under personal accounts are as follow:

1. Accounts for Debtors – i.e. persons who owe the business money. They are usually the customers of the business and their accounts have debit balances
2. Accounts for Creditors –i.e. persons to whom the business owes money. They are usually suppliers that is those who supply goods and services to the business and their accounts have credit balances. This subgroup also include Loan accounts
3. Other personal accounts including Capital account, Drawings account, Bank account etc.
4. Impersonal Accounts: All other accounts other than personal accounts will be classified as impersonal account.

Impersonal accounts are accounts that deal with assets, income and expenditure of the business.

The subgroups under impersonal account are as follows:

1. Real Accounts: These are accounts that record the tangible and physical assets or properties of the business. Example of real accounts are machinery account, furniture account, land and building account, equipment account, cash account, tools account, fittings accounts etc.
2. Nominal Accounts: These are accounts that records the gains, income, expenses and losses of the business. Examples of nominal accounts are rent account, salaries account, electricity account, carriage inwards account, carriage outwards account, discounts received account, discounts allowed account etc.

Divisions of the Ledger

Except in very small businesses there are usually too many accounts to be kept in a single ledger. It is usual to divide the accounts among several ledgers for convenience.

Dividing the ledger into sections makes it more convenient to use as the same type (similar) accounts can be kept together and the task of maintaining the ledger can be divided between several people. The ledgeris usually divided into the following specialized areas:

1. Sales Ledger –also known as the debtors ledger. All the personal accounts of debtors (credit customers) are kept in the sales ledger.
2. Purchases Ledger –also known as the creditors ledger. All the personal accounts of creditors (credit suppliers) are kept in the purchases ledger.
3. General Ledger (or Nominal Ledger) – apart from the cash account, the bank account and the accounts of debtors and creditors all the remaining accounts are usually kept in the general ledger. This ledger will contain the impersonal accounts of assets, liabilities, expenses, incomes, sales, purchase and returns.
4. Cash Books: These contains the Bank account, Cash account and the Petty Cash account
5. Private Ledger: This ledger contains the accounts of the business owner and all other accounts deemed to be of a confidential (private) nature e.g. capital account, drawings account, loan accounts, trading account, profit and loss account, balance sheet etc.

The division of the ledger as above is essential in a business which employs several bookkeepers; the work may be divided between them so that they do not all need to be working on the same ledger at the same time.

EVALUATION

1. What is an account
2. Explain, giving two examples each, the following types of account
3. Nominal account
4. Real account
5. Personal account

GENERAL EVALUATION QUESTIONS

1. Distinguish between personal and impersonal accounts
2. List and explain the classification of accounts
3. Explain the term double entry system of bookkeeping
4. What is a ledger
5. State two advantages of dividing the ledger into specialist areas.

WEEKEND ASSIGNMENT

1. Lara purchased goods costing N1, 800 less trade discount of 30%. She was allowed cash discount of 5%. How much should Lara have to pay for the goods A. N1, 080 B. N1, 197 C. N1, 260 D. N1, 800
2. Which of the following accounts normally has a credit balance A. discounts allowed B. discounts received C. purchases D. sales returns
3. Which of the following books of account is part of the double entry system A. General Journal B. Petty Cash Book C. Sales Returns Book D. Purchases Returns Book
4. The personal accounts of creditors are found in the A. Sales ledger B. Purchases ledger C. General ledger D. Nominal ledger
5. Which of the following is not an example of a real account A. cash B. bank C. equipment D. fixtures and fittings

THEORY

1. (a) What is a ledger
2. List and explain three classification of the ledger
3. List ten accounts found in the nominal ledger