Ledger Account and Classification of Account

Learn the classification of accounts, ledger preparation, debit and credit rules, double-entry principle and practical accounting illustrations explained in a simple and examination-focused format.

Introduction

Understanding the classification of accounts makes it easier to determine how transactions are recorded in the books of accounting. Every accounting transaction affects at least two accounts and must follow the double-entry principle.

Classification of Account

Accounts are broadly classified into:

Personal Account

Accounts relating to individuals, customers, suppliers and organizations that transact with the business.

Impersonal Account

Accounts relating to assets, incomes and expenses of the business.

Personal Account

Debtors

Customers who purchase goods on credit from the business.

Creditors

Suppliers from whom goods are purchased on credit.

Important: Personal accounts are opened in the names of individuals or organizations. This is why debtors and creditors are classified as personal accounts.

Impersonal Accounts

Real Account

Accounts of long-term tangible assets such as Buildings, Furniture, Machinery and Motor Vehicles.

Nominal Account

Accounts of incomes and expenses such as Sales, Purchases, Salaries and Electricity.

What is a Ledger?

A Ledger is the principal book of account where all accounting transactions are permanently recorded.

A ledger is known as the Book of Final Entry because all accounting transactions eventually find their final record in the ledger.

Types of Ledger

Ledger Type	Purpose
Sales Ledger	Recording Credit Sales
Purchases Ledger	Recording Credit Purchases
Return Inward Ledger	Goods Returned by Customers
Return Outward Ledger	Goods Returned to Suppliers
Cash Book	Recording Cash Transactions
General Ledger	Other Transactions not recorded elsewhere

Format of a Ledger Account

Motor Van Account
Debit (Dr)	Credit (Cr)

Double Entry Principle

For every Debit Entry, there must be a corresponding Credit Entry and for every Credit Entry, there must be a corresponding Debit Entry.

Every transaction affects two accounts. One account receives value while another account gives value.

Debit and Credit Rules

Account Type	Normal Balance
Assets	Debit
Expenses	Debit
Income	Credit
Liabilities	Credit

Worked Example

Transaction:

Purchased Motor Van in Cash ₦100,000.

Accounts involved:

• Cash Account
• Motor Van Account

Motor Van receives value → Debit Motor Van Account.

Cash leaves the business → Credit Cash Account.

Cash Account

Cash Account
Debit	Credit
	Motor Van ₦100,000

Motor Van Account

Motor Van Account
Debit	Credit
Cash ₦100,000

Key Points to Remember

• Personal Accounts relate to people and organizations.
• Impersonal Accounts include Real and Nominal Accounts.
• Ledger is the Book of Final Entry.
• Assets and Expenses are Debit Entries.
• Liabilities and Incomes are Credit Entries.
• Every transaction follows the Double Entry Principle.