Financial account

A financial account (or, simply, account; hereinafter, the Account) is an accounting device used in bookkeeping to record increases and decreases of business transactions relating to assets, liabilities, capital, withdrawals, revenue, and/or expenses. In other words, the Account is the concept that is used to record financial entries of a similar nature such as cash increases (debits) or decreases (credits) or, vice versa, accounts payable increases (credits) or decreases (debits). Active accounts are debited when they increase; passive accounts are debited when decrease. Every organization can establish its own list of account titles, which is called the chart of accounts.

Classification of accounts Based on nature

An account may be classified as real, personal or as a nominal account. Type Represent Examples Real Physically tangibile in the world and certain intangible things not having any physical existence Tangibles – Plant and Machinery, Furniture and Fixtures, Computers and Information processors, Cash accounts etc. Intangibles – Goodwill, Patents and Copyrights Personal Business and Legal entities, Bank accounts Individuals, Partnership firms, Corporate entities, Nonprofit organizations, any local or statutory bodies including governments at country, state or local levels Nominal Temporary Income and Expense accounts for recognition of the implications of the financial transactions during each fiscal year until finalization of accounts at the end Sales, Purchases, Electricity charges

Example: A sales account is opened for recording the sales of goods or services and at the end of the financial period the total sales are transferred to the revenue statement account (Profit and Loss Account or Income and Expenditure Account).

Similarly expenses during the financial period are recorded using the respective Expense accounts, which are also transferred to the revenue statement account. The net positive or negative balance (profit or loss) of the revenue statement account is transferred to reserves or capital account as the case may be. Based on periodicity of flow

The classification of accounts into real, personal and nominal is based on their nature i.e. physical asset, liability, juristic entity or financial transaction.

The further classification of accounts is based on the periodicity of their inflows or outflows in the context of the fiscal year:

   Income is a short term inflow during the fiscal year.
   Expense is short term outflow during the fiscal year.
   An asset is a long term inflow with implications extending beyond the financial period and by the traditional view could represent unclaimed income. Alternatively, an asset could be valued at the present value of its future inflows.
   Liability is a long term outflow with implications extending beyond the financial period and by the traditional view could represent unamortised expense. Alternatively, a liability could be valued at the present value of future outflows.

Type of accounts Long term inflows Long term outflows Short term inflows Short term outflows Real Assets Personal Assets Liability Nominal Incomes Expenses

Items in accounts are classified into five broad groups, also known as the elements of the accounts:[2]

   Asset, Liability, Equity, Revenue, Expense

The classification of equity as a distinctive element for classification of accounts is disputable on account of the "entity concept", since for the objective analysis of the financial results of any entity the external liabilities of the entity should not be distinguished from any contribution by the shareholders.