{"id":2442,"date":"2019-09-12T13:33:00","date_gmt":"2019-09-12T13:33:00","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=2442"},"modified":"2026-04-01T18:34:37","modified_gmt":"2026-04-01T18:34:37","slug":"classification-accounts","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/classification-accounts\/","title":{"rendered":"Classification of Accounts"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": [\n    {\n      \"@type\": \"Question\",\n      \"name\": \"In which of the following elements would the tax payable account be recorded?\",\n      \"answerCount\": 3,\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"The correct answer is B. Liabilities. Tax payable is recorded as a liability on the financial statements because it represents an obligation the company owes.\"\n      }\n    }\n  ]\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Financial Reporting Standards (2021 Level I CFA\u00ae Exam \u2013 Reading 22)\",\n  \"description\": \"This CFA Level 1 video covers Financial Reporting Standards, explaining the objectives of financial statements, standard-setting bodies (IASB, FASB), and regulatory authorities (e.g., SEC, IOSCO). It details IFRS vs. US GAAP, reporting elements, desirable attributes, global convergence issues, and how analysts use disclosures, valuation methods, and monitoring changes in standards.\",\n  \"uploadDate\": \"2018-11-23T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/i.ytimg.com\/vi\/HEL3pNskRoQ\/hqdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=HEL3pNskRoQ\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/HEL3pNskRoQ\",\n  \"duration\": \"PT31M49S\"\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\" width=\"560\" height=\"315\" src=\"https:\/\/www.youtube.com\/embed\/HEL3pNskRoQ?si=1cLlOFq-wC4RzSJr\" title=\"YouTube video player\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe>\n\n\n<p>Business activities can be reflected in any one of the five broad categories of financial statement elements: assets, liabilities, owners\u2019 equity, revenue, and expenses.<\/p>\n<p>Within these financial statement elements are sub-classifications referred to as accounts, which provide individual records of increments and decrements in specific assets, liabilities, components of shareholders\u2019 equity, revenue, or expenses.<\/p>\n<h2><strong>Relationship Between Financial Statement Elements and Accounts<\/strong><\/h2>\n<p>A company\u2019s financial statements are constructed using the five elements.<\/p>\n<p>Assets are regarded as the economic resources that a company has, liabilities represent creditors\u2019 claims on these resources, while owners\u2019 equity is the residual claim on the resources. These three elements are reported on the statement of financial position or balance sheet.<\/p>\n<p>Revenues are the inflows of economic resources to a company, while the expenses represent the outflows of economic resources or increments in liabilities. These two elements are reported on the statement of comprehensive income or profit &amp; loss statement.<\/p>\n<p>The amounts recorded in individual accounts are summarized and grouped within each financial statement element. Unlike the elements, however, there is no universal standard set of accounts which is applicable to every company. A company, therefore, has to select the accounts and account groupings which can summarize the volumes of its accounting data. Such data is critical in the preparation of a company&#8217;s financial statements. In addition, the decisions a company makes are premised upon the data.<\/p>\n<p>Common accounts recorded as assets include:<\/p>\n<ul>\n<li>cash and cash equivalent;<\/li>\n<li>accounts receivable;<\/li>\n<li>inventory; and<\/li>\n<li>property, plant and equipment<\/li>\n<\/ul>\n<p>Common accounts recorded as liabilities include:<\/p>\n<ul>\n<li>accounts payable;<\/li>\n<li>current and deferred tax liabilities; and<\/li>\n<li>bonds payable<\/li>\n<\/ul>\n<p>Common accounts recorded as owners\u2019 equity include:<\/p>\n<ul>\n<li>paid-up capital;<\/li>\n<li>reserves; and<\/li>\n<li>retained earnings<\/li>\n<\/ul>\n<p>Common accounts recorded as revenue include:<\/p>\n<ul>\n<li>sales;<\/li>\n<li>gains from trading; and<\/li>\n<li>investment income<\/li>\n<\/ul>\n<p>Common accounts recorded as expenses include:<\/p>\n<ul>\n<li>cost of goods sold;<\/li>\n<li>depreciation; and<\/li>\n<li>interest expense<\/li>\n<\/ul>\n<p>The accounts used in a company\u2019s accounting system are set out in its chart of accounts, which provides more details than the financial statements.<\/p>\n<p>Some accounts are used to offset other accounts known as contra accounts. Examples of contra accounts include allowance for bad debt (which offsets the accounts receivable account), accumulated depreciation (which offsets the property, plant and equipment account), and sales and returns allowances (which offsets the revenue account).<\/p>\n<blockquote>\n<h2><strong>Question<\/strong><\/h2>\n<p>In which of the following elements, would the tax payable account be recorded?<\/p>\n<p>A. Assets<\/p>\n<p>B. Liabilities<\/p>\n<p>C. Owners\u2019 equity<\/p>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is B.<\/p>\n<p>Tax payable is recorded in the \u201cliabilities\u201d element on the financial statements.<\/p>\n<\/blockquote>\n<p><em>Reading 22 LOS22b:<\/em><\/p>\n<p><em>Explain the relationship of financial statement elements and accounts, and classify accounts into the financial statement elements<\/em><\/p>\n<div class=\"notes_inv\"><hr \/>\n<p><em><a href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/learning-sessions-curriculum-financial-reporting-and-analysis\/\">Financial Reporting and Analysis &#8211; Learning Sessions<\/a><\/em><\/p>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>Business activities can be reflected in any one of the five broad categories of financial statement elements: assets, liabilities, owners\u2019 equity, revenue, and expenses. Within these financial statement elements are sub-classifications referred to as accounts, which provide individual records of&#8230;<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5],"tags":[],"class_list":["post-2442","post","type-post","status-publish","format-standard","hentry","category-financial-reporting-and-analysis","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Classification of Accounts | CFA Level 1 - AnalystPrep<\/title>\n<meta name=\"description\" content=\"Understand how financial accounts are categorized into assets, liabilities, equity, revenue, and expenses for reporting and analysis.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/financial-reporting-and-analysis\/classification-accounts\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Classification of Accounts | CFA Level 1 - 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