Account Classification in Accounting and Examples

Account classification in accounting is a process in preparing financial reports to make them more structured.

The main objective itself aims at making it easier to record and analyze the company finances for its users of financial reports.

Therefore, knowing what types of accounts exist and how they are classified in accounting is important enough for accountants. Today, we will be able to help you understand this comprehensively.

What is Account Classification in Accounting?

Account classification in accounting is a method for grouping accounts according to their type and characteristics when recording transactions.

An account is defined as a systematic record containing financial transactions.

Therefore, account grouping aims to manage transaction recording, as a performance analysis tool, and to prepare more accurate and structured financial reports.

In accounting, there are 5 (five) types of account classification, namely:

1. Liability or Debt Accounts

Liability or debt accounts include all account components that reflect debts that need to be paid to external parties.

This account is divided into two types, namely:

  • Current Liabilities ( Current Liabilities )

Short-term liabilities with a purpose to mature in much less than 365 days. Examples include exchange payables, promissory notes payable, tax payables, or unearned revenue payables.

  • Long Term Debt

Meanwhile, long-term debt is an obligation with a maturity of more than one year, such as bank debt, bonds and mortgage debt.

Find out the ins and outs of debt in the article Understanding Debt, Types and Characteristics in Companies

2. Asset Account

Asset accounts include all wealth owned by the company, both tangible and intangible.

In  the Chart of Account  (CoA) asset accounts will generally be grouped together to facilitate tracking and management.

Types of asset accounts are also divided into two, namely:

  • Current Assets​

Types of assets which can be results easily liquidated inside three hundred and sixty five days, as an instance cash, money owed receivable, products stock, and promissory notes receivable.

Understand the following two types of accounts in Types of Assets in Accounting You Should Know

  • Fixed Assets​

A type of asset that is difficult to find and requires a certain period of time to be converted into money.

For example, production factory machines, land, buildings, and vehicles.

3. Revenue Account

A revenue account is an account that records profits or income from daily business activities, such as sales of goods or services, or from other sales channels.

Apart from these two sources of income, dividends obtained from company investments are also included.

Revenue  accounts  are divided into two, namely:

  • Operating revenues

Income derived from core business activities, such as sales of products and services.

  • Income Outside Business

Sources of income that do not come from the company’s main business, such as interest and rental income.

4. Capital Account

Capital or equity accounts include all accounts that show the value of assets owned by the company minus total liabilities.

This account represents contributions from capital and accumulated retained earnings.

As for capital accounts, they include:

  • Capital stock

A group of accounts originating from investments made by investor owners in the form of shares.

  • Retained earning

Contains capital components whose profits come from the company which are not distributed as dividends, but are retained within the company.

5. Expense Account

Finally, there is an expense account that groups together accounts for recording all costs incurred in running the company’s operations.

To calculate the company’s expenses, you can subtract the profits generated by the expenses incurred in the same period.

Expense accounts are divided into two, namely:

  • Operating expenses

Contains all expenses directly related to daily business operations, such as employee salaries, utility costs, or fixed asset depreciation expenses.

  • Expenses Outside Business

The second division consists of expenses that are not related to the business, such as interest expenses or losses on the sale of fixed assets for example.

Conclusion

That is the explanation and examples of account classification in accounting which plays a role in financial reports remaining structured and accurate.

Categorizing accounts into proper liabilities, assets, revenues, capital, and expenses helps companies more easily track the sources and uses of funds, and get a clear picture of their financial position.

If these accounts are managed properly, companies can maintain compliance and report structure for better decisions regarding investment and cash management.

To improve accuracy and efficiency, one tip that companies can do is to use accounting software, which allows automatic recording, reduces the risk of errors, and presents real -time financial reports that will support faster and more accurate decision making.

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