Accounting Terms - The Essence of Account
Since the purpose of accounting is to record, 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
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.
If you want more detailed understanding of accounting, you can easily and
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Accounting Basics - Essence of T-Account
Exploring accounting basic it is important to understand that all the accounting
data has to be recorded and classified properly in order to become a basis for
the preparation of financial statements, which need to be clear, correct and
reliable. So the first step towards proper financial reporting is adequate
recording of the accounting information related to the business. For this purpose
such data is usually is grouped into accounts, each of them having its own name
and purpose. T-account is a certain form of the account, which will be explore
in more details in this article.