Accounting Account Types and Asset Valuation Methods

Complementary and Valuation Accounts

Complementary accounts represent a decrease in the balance of the asset accounts to which they are valued. Valuation accounts are used to reflect the realizable value of an asset or to show the book value and historical cost distribution. Some additional accounts for asset valuation include:

• Allowance for Doubtful Accounts
• Accumulated Depreciation

Example of Asset Valuation

If we assume that a machine used in production loses value due to wear and tear amounting to $40,000, the account that reflects this loss of property valuation must be recorded. In this case, the accounting information would be as follows:

• Machinery (Cost Value): $100,000
• Less: Impairment Loss (Accumulated Depreciation): ($40,000)
• Current Book Value: $60,000

Prepayments and Transitional Accounts

These accounts are used to reflect operations that, due to contracts or casual situations, prevent us from making immediate charges or credits to the accounts reflecting the business done. As the name transitional implies, once the contract or the event giving rise to the entry ceases, these accounts are canceled or cleared out. Examples include:

• Goods in Transit
• Pending Claims
• Games held in abeyance
• Cash differences

Example of Transitional Entries

Suppose there is a shortage of $5,000 in cash. Until the underlying causes are discovered, we open an account called Cash Differences. The accounting entry would be:

• Debit: Difference in Box $5,000
• Credit: Cash $5,000

If it is later discovered that the lack of money was due to the purchase of a calculator (office equipment) that was not registered, we must make the following entry:

• Debit: Office Machines $5,000
• Credit: Difference in Box $5,000

Order Accounts in Financial Reporting

Order accounts are those that control operations that do not alter the nature of the property, rights, or obligations of an entity. Order accounts receivable are shown at the end of the assets section, and creditor order accounts are shown at the end of the liabilities and equity sections. Thus, they are part of the Balance Sheet but do not represent actual assets, liabilities, or equity.

Nominal or Results Accounts

Nominal accounts are those that record increases in equity through income, or decreases through costs and expenses, occurring within a given period.

Heritage and Equity Accounts

These accounts show the amounts contributed by shareholders, as well as the gains or losses realized from transactions with equity or arising from normal business activities. The accounts most commonly found within the estate or equity section are:

• Capital
• Surplus
• Reserves