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What is An Account?

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Numerous transactions take place in business concerns every day. For example, goods are sold to various customers every day, purchases are made from suppliers, cash is paid to creditors and is received from debtors, expenses are paid etc. All these transactions should be properly analyzed and recorded. Again, the concept of double change in a business transaction is important to keep in mind. To record these changes different accounts are maintained in the ledger (Read our detailed article about ledger).

Definition and Explanation of Account:

Account is the individual record of an asset, a liability, a revenue, an expense or capital, in a summarized manner. For example, the individual record of sales is 'sales account'. In the same way there are so many accounts which are opened in the ledger like salary account, machinery account, furniture account etc. How many accounts there should be in the ledger of a business? It depends upon the nature and size of the business.

Generally one full page is fixed in the ledger for each account. But it depends, how many times the changes take place in that particular account. Some accounts are very busy accounts like cash account, bank account and sales account. Obviously for such accounts one page for each will not be enough and so, they need more pages in the ledger to be fixed. In some accounts, changes take place only once or twice in a year, so only one page will be enough. e.g. machinery account, capital account, loan account etc.

There are two types of changes that may take place in an account, e.g. either there will be increase or there will be decrease. Take the example of cash (an asset), either there is inflow of cash or there is outflow of cash. To record these two types of changes, every account (a page) is divided in two sides. Increase is recorded on one side and decrease is recorded on the other side. The specimen of an account (a 'T'  form of an account) is shown below:

what is an account

When a change takes place in an account, either it will be recorded on the left side (debit side) or on the right side (credit side). Amounts recorded on the left side of an account, regardless of the account title, are called debits, and the account is said to be debited. Amounts recorded on the right side of an account are called credits, and the account is said to be credited. Now keeping in mind the concept of double change in every business transactions, we can say that every business transaction affects a minimum of two accounts and every change (in a particular transaction) is recorded in a separate account. Now question arises, how the changes are recorded in different accounts? It depends upon the rules of debiting and crediting which have been discussed on rules for debits and credits page.

Example:

For example, furniture is purchased for $20,000 on cash basis. This is a business transaction and it has brought two changes.

  1. Increase in furniture by $20,000 (an asset).
  2. Decrease in cash by $20,000 (an asset).

These two changes are recorded in two accounts: furniture account and cash account in the following way:

Furniture Account

$    

20,000

 

Cash Account

 

$    

20,000

When an amount of $20,000 is recorded on the debit side (left side) of furniture account, it is said that furniture account is debited and when an amount of $20,000 is recorded on the credit side (right side) of cash account, it is said that cash account is credited. When an asset increases the account of that asset is debited and when an asset decreases the account of that asset is credited.  Click here to read a detailed article about rules of debit and credit.

 

More study material from this topic:

 Analysis of Business Transaction
 Double Entry System
 Single Entry System
 Difference Between Double Entry System and Single Entry System
 What is An Account?
Questions and Answers

 

A D V E R T I S E M E N T

 

Financial Accounting Topics


  Introduction to Accounting
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  Transactions and Accounting Equation
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  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Accounting for Bills of Exchange
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Final Accounts
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  Work Sheet
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  Capital and Revenue Items
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  Valuation of Inventories
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  Accounts of Non-profit Making Organizations
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  Statement of Cash Flows
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  Accounting Ratios Analysis
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  Depreciation, Provisions and Reserves
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  Accounting Dictionary
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  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
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  Cost Volume Profit Relationship
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  Variable Costing System
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  Materials and Inventory Cost Control
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  Activity Based Costing System
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  Standard Costing and Variance Analysis
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  Balanced Scorecard
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  Capital Investment Analysis/Capital Budgeting
 

 

 

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