How are accounting accounts or bookkeeping accounts classified?
Do you know how accounting accounts orbookkeepingaccounts are classified? We know it sounds redundant. However, it is the way that companies have to make an orderly record of all business operations that have an impact, at the accounting level, on their net worth.
The issues involved in accounting management within a company require the utmost rigor and mastery if you want to ensure the smooth running of your business. Hence the importance of knowing how to identify, manage and control your accounts.
Since there are several concepts that must be mastered in order to clearly understand the accounting accounts and how they are grouped, throughout this article we will include and review some notions that will allow you to further optimize your accounting process.
Without further ado, let's get started 👇.
Accounting accounts? What are they?
Accounting accounts are the way companies identify and classify their business operations, so that their accounting process can be carried out in the clearest and most efficient way possible.
This record of operations, which consists of a number or code assigned to each group, is carried out taking into account:
- the type of transaction (classification according to the nature of the transaction: purchases, taxes, depreciation, etc.),
- the chronological order (classification according to the date on which they are generated).
How are accounting accounts classified?
1. Real accounts
These accounts are of a permanent nature, i.e. they remain active or open for more than one accounting period. This is where you find the subaccounts that refer to the assets, liabilities and capital of the company.
They are called real because they are the ones that provide a true view of the company's Statement of Financial Position.
2. Nominal Accounts
These accounts, unlike the actual accounts, do not remain permanently open, but are closed at the end of each accounting period.
The subaccounts recorded here correspond to the costs, expenses and revenues corresponding to a specific accounting period and are useful mainly for analyzing the Income Statement.
How are the accounting accounts grouped?
There are 9 groups into which the PGC classifies the accounts, according to their type. For each account belonging to one of these groups, there is a number and a name.
| Group | Name |
| 1 | Basic financing |
| 2 | Fixed assets |
| 3 | Inventories |
| 4 | Accounts payable and receivable |
| 5 | Financial accounts |
| 6 | Purchases and expenses |
| 7 | Sales and income |
| 8 | Equity expenses |
| 9 | Income from shareholders' equity |
Group 1. Basic financing
This group includes all the accounts relating to the long-term financing of the company, i.e., what will constitute its capital. Some of the sub-accounts that are part of this group are: shares or participations, reserves, subsidies, donations and adjustments for changes in value.
Group 2. Fixed assets
To this group belong the assets, both tangible and intangible, of the company, which last beyond an economic cycle. For these it is necessary to consider their eventual loss of value. As subcategories, we could mention: machinery, furniture, investments in land and natural assets.
Group 3. Inventories
Stocks refer to the raw materials necessary for the company's activity, but also include everything related to packaging, waste, recovered materials, finished or semi-finished products.
Group 4. Trade accounts payable and receivable
This group reflects both tax and social obligations, as well as the rights arising from the company's commercial activity. That is why this group will include suppliers, customers, creditors and debtors.
Group 5. Financial accounts
Here all the short-term financial obligations that the company may be subject to and that are framed within its treasury process should be recorded. That is to say, everything related to cash, liabilities, shares and debts, is compiled in this group.
Group 6. Purchases and expenses
This group includes all the purchase operations carried out by the company within the framework of its activity and for which it will be necessary to indicate their possible loss of tangible, intangible and financial value. This group includes subcategories related to non-current assets, insurance premiums, taxes and other external services, such as leases.
Group 7. Sales and revenues
This group includes everything that came into the company as a result of sales and income, either because they constitute financial benefits or excesses in past provisions. In this sense, discounts, subsidies, reversals and any other type of income are included here.
Group 8. Expenses charged to equity
Expenses charged to equity are those economic operations that have a negative impact on the company's equity. These may be due to translation differences, taxes, transfers and impairment of equity interests.
Group 9. Income imputed to shareholders' equity
This group is used to detail transactions that reflect possible increases in equity due to tax regulations or financial markets. Such income includes subcategories such as transfers of losses on financial assets or gains on investment hedges.
Other basic concepts
1. Assets
This is the account of everything that the company owns and that contributes to its economic development.
It includes, for example, machinery and real estate, money in the bank, money owed by customers who have not yet paid (trade receivables), or stocks of raw materials or products that will soon be sold.
They are classified on the balance sheet according to the speed with which the company can convert them into cash.
2. Liabilities
Contrary to assets, liabilities are the account of all the company's financial obligations.
It is the money that the company owes to investors (shareholders, partners, etc.), to which are added other amounts owed: loans to the bank, debts to suppliers, employee salaries, state taxes.
3. Equity
It represents the results obtained at the end of the activity (assets minus liabilities) and includes all the contributions made by the partners (capital stock, reserves, etc.).
4. General Chart of Accounts (PGC)
A general accounting plan is a document that sets out the accounting rules applied in Spain and formalizes the rules of presentation of the accounts that companies are obliged to respect, in accordance with the laws set out in the Commercial Code:
- Definition of balance sheet, income statement, annexes.
- Transcription of the accounting rules relating to the behavior of the company.
- Method of presentation of the annual accounts and summary documents to be provided.
- Details of the nomenclature to be used for keeping the accounts, in particular for keeping the journal and the general ledger.
Parts that make up an accounting account
Depending on the volume of business handled by your company, the number of accounts and sub-accounts to be handled will increase and you will require a meticulous organization for each component that originates an accounting entry.
A T-shaped graphical representation allows you to differentiate the debit or credit operations of the accounts, by means of the so-called movement columns. To put into practice this graphic exercise, it is necessary to identify some elements.
1. The account holder or account name
This corresponds to the name under which the account has been assigned and is the heading of the diagram. Basically, it is the element that will allow the account to be identified.
2. Debit or Debit
Located on the left side of the graphical representation of the account, it corresponds to all the operations that imply an income or increase.
Asset accounts increase the debit and decrease the credit (debit account), so it is the debits that are recorded here.
3. Credit or Credit
Located on the right-hand side of the T. Account, it corresponds to all transactions involving an outflow or decrease.
Liability accounts increase to the credit and decrease to the debit (credit account), so it is the credits that are recorded here.
4. Balance
This is nothing more than the difference between the debit and credit, which can be classified in two ways:
- Debit balance, when the sum of the debits of the account is greater than the sum of the credits.
- Credit balance, when the total of credits is greater than the total of debits.
Chart of accounts: optimizing your accounting process
Keeping an orderly record of your company's business operations is essential for understanding and controlling the financial status of the business and making good decisions in the future.
Since the volume of information handled at the accounting level can be very high, companies need to implement a chart of accounts or procedures to optimize the accounting process and have control over their financial movements.
Now that you have the necessary basic information, you can stop worrying at night counting sheep to be able to sleep, and relax during the day counting accounts that allow you to produce 😉🐏.
Article translated from Spanish