Since the purpose of accounting is to records, summarize and provide financial data about business to different users of such data, it is necessary to have certain means to achieve that purpose. One of the means is called account and this is one of the most important accounting terms. Let us explore its essence and practical necessity.
Account helps to keep records and track information about each individual asset, liability, equity, revenue and expense. Complete list of accounts used by the business for accounting purposes is called general ledger, which can be different depending on the size, purpose and other particularities of the business. Accounts are used to classify financial data into categories and keep all the required information on what happened to that particular category during the certain accounting period. Since information in the financial statements is classified into assets, liabilities, equity, revenue and expenses, each type of these items has separate account.
Structure And Example
For example cash in bank, petty cash, accounts receivable, accounts payable, share capital, sales revenue, administrative expenses, cost of goods sold - all these categories of accounting data will have its own separate account. So what is the form of account? It the simplistic way we can say, that each account has a T form, since it has two sides. Left side is called Debit side. Right side is called Credit side. Also each account has a title. You can see simplified illustration further.
_D____________Title_____________C__
Decreases And Increases In Balances
Debit and Credit sides of the accounts are used to reflect either increase, or decrease in the balance of certain account. At the beginning and end of each accounting periods all the accounts, except for revenue and expenses accounts, will have balances on the debit or credit side, depending on the category of account.
In case we have accounts belonging to the category of assets increase in balances of these accounts is recorded on the Debit side, decrease - on the Credit side. These accounts will have debit balance at the beginning and at the end of the accounting period. In case we have accounts belonging to the category of equity or liabilities increase in the balances of these accounts is recorded on the Credit side, decrease - on the Debit side. These accounts will have credit balance at the beginning and the end of the accounting period. In case we have accounts belonging to revenue category, increase in revenue accounts is reflected on Credit side, decrease - on Debit. For expenses accounts it is visa versa. Important aspect to remember that revenue and expenses accounts will not have opening or closing balances, since these accounts are used only for certain accounting period and are closed by transferring the balance accumulated during the period to Retained Earnings account.
Double Entry Principle
While business transaction is recorded, it always has an impact on at least two accounts. Therefore one account is debited and another account is credited. Such action in accounting terms is called double entry accounting.
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