Account Classification Method and Its Examples

account classification method help

Before we dive into the examples, let’s first figure out what account classification stands for. Account classification method:

  • is also referred to as account analysis
  • is a cost estimation method which involves the study of an account in the general ledger
  • identifies cost as a particular type and draws inferences from past behaviour to understand the expected cost in the future
  • fixed costs do not change production levels while variable costs or semi-variable costs change the production output
  • classify rent as a fixed cost, raw materials as a variable cost and telephone expenses as semi-variable cost
  • formulate a cost function or cost equation: Y = a + bX
  • determine a cost (Y) by adding the fixed cost (a) to the variable cost (bX)

What is the accounting equation? Read more about it now!

Account Classification Accounting Niceties

Here are a few things that you have to keep in mind when dealing with account classification method:

  • it involves the classification of general ledger accounts
  • when recording of accounting entries, they will fall into one of the 5 main types of accounts: asset, liability, equity, revenue and expense
  • first 3 classifications (i.e. asset, liability and equity) are balance sheet accounts
  • balance sheet accounts are reported on a financial statement known as the balance sheet
  • last 2 classifications (i.e. revenue and expense) are income statement accounts
  • income statement accounts are reported on the financial statement known as the income statement
  • acts as a requirement for the certain class of accounts to be entered in specific entry fields
  • as an example, retained earnings account entry allows an account classified as retained earnings and will not allow a bank account
  • restricts accounts to a specific process, as a cash account can only be used to pay bills
  • Assets: tangible and intangible assets that the business owns and they have value (e.g. cash, computer systems, patents)
  • Liabilities: money that the firm owes to others (e.g. mortgages, vehicle loans)
  • Equity: that part of the total assets that the owners or shareholders of the organization fully own; have purchased outright
  • Revenue or Income: money the company earns from its sale of goods or services, and interest and dividends earned from marketable securities
  • Expense: money the firm expend to produce the goods or services which it sells (e.g. office supplies, utilities, advertising)
  • further classify assets and liabilities as current or long-term assets liabilities.
  • current assets are completely consumed, sold or converted into cash in 12 months or less.
  • long-term or fixed assets have a life span of at least a year or longer.
  • current liabilities are debts which are paid within 12 months.
  • long-term liabilities are debts which are paid in years instead of months.

Main Types of Accounts

Account Classification Method Example

account classification method example

 

 

 

 

Each of the following accounts is either an Asset (A), Liability (L), Shareholders’ Equity (SE), Revenue (Rev), Expense (Exp) or Dividend (Div) account. Identify the second blank as “C” If the item is current.

A/L/SE/Rev/Exp/Div

C?

  Car loan L C
  Software A C
  Wages expense E
  Office furniture A
  Long-term investments A
  Inventory A C
  Small tools A
  Accounts payable L C
  Retained earnings SE
  Accounts receivable A C
  Property A
  Repair revenue Rev
  Maintenance expense E
  Interest expense E
  Salaries payable L C
  Subscription revenue Rev
  Common shares SE
  Equipment A
  Prepaid insurance A C
  Income tax expense E
  Mortgage payable L C
  Cash A C
  Insurance expense E


To sum it up, accounting classification is a method of classifying the accounts in the general ledger into five main categories: assets, liabilities, equity, revenue and expenses. Our accounting formulas cheat sheet can help you deal with further calculations.

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Account Classification Method and Its Examples
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