Classification Of Accounts

Question 1

1. Personal Accounts

Answer 1

Represent individuals, firms, or entities with a monetary relationship with the business. These are accounts of people or organizations the business deals with .

Question 2

Types:
A.Natural Personal Accounts:

Answer 2

Accounts related to individual human beings (e.g., Customers, Suppliers).
Example: Accounts Receivable (John Doe), Accounts Payable (Jane Smith).

Question 3

B.Artificial Personal Accounts:

Answer 3

Accounts related to organizations or entities (not natural persons) (e.g., Companies, Banks, Government bodies).
Example: Utility Companies (e.g., Electric Co.), Banks (e.g., XYZ Bank).

Question 4

C. Representative Personal Accounts:

Answer 4

Accounts that represent an individual’s or organization’s current liabilities or assets.
Example: Prepaid Expenses, Accrued Expenses

Question 5

2. Impersonal Accounts

Answer 5

Accounts not related to specific individuals or entities.
Categorized into: Real Accounts and Nominal Accounts

Question 6

Types :
A.Real Accounts

Answer 6

Also known as permanent accounts. Represent assets and liabilities that carry over from one accounting period to the next.
Where recorded: Balance Sheet

Types:
1.Asset Accounts: Represent resources owned by the business.
Example: Cash, Inventory, Equipment, Real Estate.

2. Liability Accounts: Represent obligations or debts owed by the business.
   Example: Accounts Payable, Loans Payable, Mortgage Payable.

Question 7

B. Nominal Accounts

Answer 7

Also known as temporary accounts. Represent income, expenses, and gains or losses that are reset (closed) at the end of each accounting period.
Where recorded: Income Statement.

• Types:
  1.Revenue Accounts: Represent income earned from business operations.
  Example: Sales Revenue, Service Revenue, Interest Income.

2. Expense Accounts: Represent costs incurred in the process of earning revenue.
   Example: Rent Expense, Salaries Expense, Utility Expense.

Question 8

Reasons & benefits of classification

Answer 8

1. Organised financial record :
   Systematically organizes transactions, making it easier to track and manage different account types.
   Key Benefit: Easy tracking and management

Question 9

2.Accurate Financial Reporting:

Answer 9

Categorizing accounts ensures financial statements accurately reflect the business’s financial position and performance.

Key Benefit: Accurate representation of finances.

Question 10

3.Easier Financial Analysis:

Answer 10

Proper classification allows for detailed analysis of assets, liabilities, revenues, and expenses, aiding in budgeting, forecasting, and decision-making.

Key Benefit: Facilitates in-depth financial analysis for better decisions

Question 11

4.Compliance and Audit Trail:

Answer 11

Ensures financial records are maintained in compliance with accounting standards and provides a clear audit trail for verification and review.
Key Benefit: Regulatory compliance and auditability.

Question 12

5.Efficient Error Detection:

Answer 12

help in identifying and correcting errors more efficiently by clearly segregating different types of transactions.
Key Benefit: Easier error identification and correction.

Question 13

6.Simplified Account Management:

Answer 13

clearly defines the nature and scope of each account, which facilitates better control and monitoring of financial activities.
Key Benefit: Easier control and monitoring of accounts.