How will You Classify the Accounts?

Accounting is fully dependent on the large number of accounts. Small business owner has to make different accounts relating to their business transactions. When Small business owner utilizes the double entry accounting, he finds three Accounts personal, real and nominal accounts. But in real sense, these are also assets or liabilities. So, it is very easy for him to classify the Accounts in Assets, Liabilities for removing all confusions.

Assets Accounts

All accounts which are relating to projects in which small business owner has spent his money. Either, he can invest money in current assets or in fixed assets. According to these Assets accounts are also two type one is fixed assets account in which we can include land and building, furniture and fixture, machinery and equipment. These assets’ value is reduced after spending of time. So, depreciation is charged on these assets.
Current Assets accounts are also the main type of Assets Account and in these assets account , we can include short term assets like inventory , prepaid expenses , bill receivables , debtors and cash and bank accounts .

Liabilities Accounts

If a small business owner takes the money or work or services from other, then, it is his duty to pay or repay for this. These are called his liabilities and it his duty to make liabilities account. Liabilities accounts are also divided into current and fixed liabilities accounts. Current liabilities account is made when he takes services and different expenses are payable. He can also take goods on credit or bank overdraft. All these liabilities are showed in liabilities accounts. If he pays these current liabilities, then these current liabilities will remove after payment.
Long term liabilities accounts are relating to long term loans and it is generally taken on the security of fixed assets and when these loans are repaid, then these accounts will also remove.

Capital Accounts

Capital Accounts are relating to the owner’s equity or all money which is invested by small business owner by himself. Its other name is also Equity account. Even expenses account and income account is classified in nominal account under double entry accounting. But these are also capital account because all expenses and incomes effect on capital of him .

I can take one example

For example, if he has $ 5000 as capital and he paid first money rent $ 50. Then its effect will be on capital and on cash

Assets = Liabilities + Capital
Cash $ 5000 = Nil + $ 5000
After paid $ 50 rent

Cash $ 5000 - $ 50 = Nil + Capital ( $ 5000 - $ 50 )
Cash $ 4950 = Nil + Capital $ 4950

So , Understand this basic accounting equation , if you are confuse to classify the accounts . Because balance system of this accounting equation will guide you, how to classify the accounts. This is one of important part of basic account and all classification of accounts is fully related with this.


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Accounting Education: How will You Classify the Accounts?
How will You Classify the Accounts?
Accounting Education
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