MODERN CLASSIFICATION OF ACCOUNTS

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There are two approaches to accounting for financial transactions viz: modern and traditional approaches.

The traditional approach is the British approach to accounting for financial transactions. Hence, the traditional approach is also called the British approach

The modern approach is the American approach to accounting for financial transactions. Hence, it is also called the American approach.

For our post title, we will be limiting our focus to the modern approach of the classification of accounts.

Modern Classification Of Account

According to the modern approach, accounts are classified into five groups: Asset accounts, liability accounts, capital accounts, revenue accounts, and expense accounts.

Asset accounts

Assets are things or items of value owned by a business. They are economic resources controlled by a business as a result of past economic events.

Assets can be classified into current and non-current assets

Current assets are assets that are expected to be converted to cash. These assets are expected to be used up within one accounting period.

Examples of current assets are cash, inventory, trade receivables (debtors), bill receivable, prepayment, etc 

Non-current assets, on the other hand, are assets that can not be easily converted. These assets are not expected to be used up within the next accounting year.

Non-current assets are sometimes called fixed assets

Examples are plant, property, and equipment.

Assets can also be classified into tangible and non-tangible assets.

Tangible assets, as its name tells us, are physical assets that can be seen and touched.

Examples of tangible assets are building, machinery, cash, inventory

Intangible assets are non-physical items. Examples are trademarks, goodwill, Copyrights, and Patent rights.

Liability accounts

These are debts or obligations payable to outsiders of creditors. 

They are money or other obligations owned by outsiders or third parties.

Like assets, liabilities can be classified into current and non-current liabilities

Current liabilities are liabilities or obligations that must be paid within an accounting year which is usually twelve months.

They include bank borrowings, trade payables (creditors), bills payables, and other short-term debts.

Non-current liabilities are not payable within an accounting year.

Examples are long-term bonds payable, long-term loans, and deferred tax obligations.

It is intuitive to note that non-current liabilities are also called fixed liabilities or long-term liabilities

Capital or owner's equity accounts

This is the money introduced by the owner. Capital can be introduced into the business using cash, furniture, or any items.

Capital can also be defined as the owner's claim against the assets of the business. It is calculated as total assets less total liabilities.

The balance in the capital account will increase when new capital is introduced. Furthermore, it also increases when the company earns a profit.

Conversely, the balance in the capital account will decrease when withdrawals or drawings are made. It also decreases when the company makes losses.

Furthermore, the name given to capital accounts varies from business to business. 

In a sole proprietorship, the name owner's capital is used. In a partnership, each partner has a separate capital account such as Samuel's capital account, victor's capital account, etc.

For a corporation where they are many shareholders, the title capital stock account is used to record any changes in the capital account.

Revenue and income accounts

Businesses receive cash when they sell goods or render services. This is called revenue.

More appropriately, revenue can be defined as the inflow that results from the primary activities of the business such as sales of goods and services.

Revenue and income accounts include all commission received, rent received, interest received, dividend earned, sales etc. 

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Expense accounts

To generate revenue, businesses have to incur some costs. These costs are called expenses. 

We can define expenses as any resources spend or any services consumed to generate revenue.

Examples of expenses are rent expenses, salaries expenses, wages expenses, supplies expenses, depreciation expenses and miscellaneous expenses

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