What are the two commonly used methods for classifying accounts

Use manual interval

Use defined interval

Use equal interval

Equal interval is best applied to familiar data ranges, such as percentages and temperature. This method emphasizes the amount of an attribute value relative to other values. For example, it shows that a shop is part of the group of shops that make up the top one-third of all sales.

In a quantile classification

Because features are grouped in equal numbers in each class using quantile classification, the resulting map can often be misleading. Similar features can be placed in adjacent classes, or features with widely different values can be put in the same class. You can minimize this distortion by increasing the number of classes.

With natural breaks classification (Jenks)

Natural breaks are data-specific classifications and not useful for comparing multiple maps built from different underlying information.

This classification is based on the Jenks Natural Breaks algorithm. For further information, see Univariate classification schemes in Geospatial Analysis—A Comprehensive Guide, 6th edition; 2007–2018; de Smith, Goodchild, Longley.

The geometrical interval classification scheme

This algorithm was specifically designed to accommodate continuous data. It is a compromise between the equal interval, natural breaks (Jenks), and quantile methods. It creates a balance between highlighting changes in the middle values and the extreme values, thereby producing a result that is visually appealing and cartographically comprehensive.

One example for using the geometrical interval classification is a rainfall dataset in which only 15 out of 100 weather stations (less than 50 percent) have recorded precipitation, and the rest have no recorded precipitation, so their attribute values are zero.

The standard deviation classification method

• Graduated colors
• Graduated symbols
• Use symbology histograms

Accounts are classified using two approaches:

• Traditional approach (also known as the British approach)
• Modern approach (also known as the American approach)

This article briefly discusses how accounts are classified under both approaches.

Classification of Accounts Under the Traditional (or British) Approach

Personal Accounts

Personal accounts are the accounts that are used to record transactions relating to individual persons, firms, companies, or other organizations.

Examples of such accounts include an individual’s accounts (e.g., Mr. X’s account), the accounts held by modern enterprises, and city bank accounts.

Impersonal Accounts

Impersonal accounts are those that do not relate to persons. There are two types:

1. Real accounts (or permanent accounts)
2. Nominal accounts (or temporary accounts)

Real Accounts

Real accounts exist even after the end of accounting period. For the next accounting period, these accounts start with a non-zero balance, which is carried forward from the previous accounting period.

Examples of such accounts include machinery accounts, land accounts, furniture accounts, cash accounts, and accounts payable accounts.

Usually, real accounts are listed in the balance sheet of the business. For this reason, they are sometimes referred to as balance sheet accounts.

Nominal Accounts

Nominal accounts are closed at the end of the accounting period. For the next account period, these accounts start with a zero balance. Nominal accounts typically cover issues such as income, gains, expenses, and losses.

Normally, nominal accounts are used to accumulate income and expense data. In turn, these data can be used to prepare income statements or trading and profit and loss accounts. For this reason, nominal accounts are sometimes referred to as income statement accounts.

Examples of nominal accounts include sales, purchases, gains on asset sales, wages paid, and rent paid.

Classification of Accounts Under the Modern (or American) Approach

The modern approach has become a standard for classifying accounts in many developed countries.

The main types of accounts used under this approach are mostly self-explanatory.

Specifically, under the modern approach, accounts are classified into the following five groups:

1. Asset accounts: Examples include land accounts, machinery accounts, accounts receivable accounts, prepaid rent accounts, and cash accounts.
2. Liability accounts: Examples include loan accounts, accounts payable accounts, wages payable accounts, salaries payable accounts, and rent payable accounts.
3. Revenue accounts: Examples include sales accounts, service revenue accounts, rent revenue accounts, and interest revenue accounts.
4. Expense accounts: Examples include wage expense accounts, commission expense accounts, salary expense accounts, and rent expense accounts.
5. Capital/owner’s equity accounts: An example is an individual owner’s account (e.g., Mr. X’s account).

Example

Consider the list of accounts shown below. Our task is to classify these accounts using both the traditional and modern approaches.

1. Plant and machinery
2. Purchases
3. Sales
4. Rent
5. Land and building
6. Cash
7. Sam’s capital
8. Loan from city bank

Traditional classification:

1. Plant and machinery > Real account
2. Purchases > Nominal account
3. Sales > Nominal account
4. Rent expense > Nominal account
5. Land and building > Real account
6. Cash > Real account
7. Sam’s capital > Personal account
8. Loan from city bank > Personal account

Modern classification:

1. Plant and machinery > Asset account
2. Purchases > Expense account
3. Sales > Revenue account
4. Rent expense > Expense account
5. Land and building > Asset account
6. Cash > Asset account
7. Sam’s capital > Capital/owner’s equity account
8. Loan from city bank > Liability account

Exercises

Traditional approach (also known as the british approach) , modern approach (also known as the american approach)

What are the 3 types of traditional approaches?

Real accounts, nominal accounts, and personal accounts

What are the 5 types of modern approaches?

Asset accounts, liability accounts, revenue accounts, expense accounts, capital/owner’s equity accounts

Why is classification of accounts important?

Classification of accounts in the ledgers is needed to create the Financial Statements. If the sale and purchase of assets have been properly recorded, that makes it easier to see asset classifications you need to report on the balance sheet.

What is the difference between a personal and an impersonal accounts?

A personal account is created and used for the personal needs of a single person, and an impersonal account can be shared with other people.

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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