Account

What is an Account?

Definition: An account is a record in an accounting system that tracks the financial activities of a specific asset, liability, equity, revenue, or expense. These records increase and decrease as the business events occur throughout the accounting period. Each individual account is stored in the general ledger and used to prepare the financial statements at the end of an accounting period.

In accounting, an account is a record in the general ledger that is used to sort and store transactions. For example, companies will have a Cash account in which to record every transaction that increases or decreases the company’s cash. Another account, Sales, will collect all of the amounts from the sale of merchandise. Most accounting systems require that every transaction will affect two or more accounts. For example, a cash sale will increase the Cash account and will increase the Sales account.

The term account is also used in transactions where suppliers sell goods to customers and grant credit terms such as net 10 days. In those situations, a supplier is selling goods on account and the customer has purchased goods on account. The supplier has also increased the balance in its current asset account entitled Accounts Receivable and the customer will increase the balance in its current liability account entitled Accounts Payable.

In banking, an account refers to an arrangement by which an organization, typically a financial institution such as a bank or credit union, accepts a customer’s financial assets and holds them on behalf of the customer at his or her discretion. Types of accounts include savings accounts, which are designed to help customers accumulate liquid assets; checking accounts, which make it easier for customers to use liquid assets to pay debts and buy goods and services; and retirement accounts, which allow customers to earn higher interest rates on money saved for old age.

“Account” can also refer to a statement summarizing the record of transactions in the form of credits, debits, accruals and adjustments that have occurred and have an effect on an asset, equity, liability, or past, present or future revenue.

In commerce, accounts are continuing relationship between suppliers (sellers) and buyers. Buyers pay for goods or services that they have received at a later date. Payment terms may be two weeks, 30 days, or even 60 or 90 days.

Large companies and government departments may ask for longer credit terms. In business, a customer who has an account, a special relationship, or an arrangement is a client. When we have a new customer, we want to set up an account which offers payment terms. However, we will probably first check whether the company is reliable, i.e. good for it. We might do this by using the services of a reputable credit agency such as Experian. As with most commercial entities, credit agencies charge for their services.

You can also write to your customer’s bank manager and ask whether they are good for a specific amount. You must ask the customer’s permission first. The bank will send you a letter, which will not directly say a flat ‘Yes’ or ‘No.’ Probably, the letter will provide enough subtle information for you to make an informed decision.

Individual people may have commercial accounts, as with Amazon.com or their local corner shop. You may even have an account with a taxi company, especially if they take your kids to school daily.

What Does Account Mean?

What is the definition of account? There are five main types of accounts used in an accounting system. Each of these are represented in the expanded accounting equation.

Assets = Liabilities + Owner’s Equity + Revenues – Expenses

An account is a unique record for each type of asset, liability, equity, revenue and expense:

  • Asset – something that is expected to generate future benefit and is owned or controlled by the company.
  • Liability – a company’s legal debts or obligations.
  • Equity – an owner’s rights or claims to the property (assets) of the business.
  • Revenue – fees earned from providing products or services.
  • Expense – decrease in the owner’s equity resulting from an outflow of cash or other valuable assets to a person or company.

Let’s take a look at an example of each

Example

Assets are resources that the company can use to generate revenues in current and future years. Asset accounts have a debit balance and are always presented on the balance sheet first.

Liabilities represent the debt obligations that the company owes to creditors. This can include bank debt as well as notes from owners. Liability accounts have a credit balance and appear below assets on the balance sheet.

Equity accounts represent the owner’s stake in the business. Equity is often called net assets because it shows the amount of assets that the owners actually own after the creditors have been paid off. You can calculate this by flipping the accounting equation around to solve for equity instead of assets.

Revenue and expense accounts are technically both temporary equity accounts, but they are significant enough to mention separately. Revenue accounts track the income generated by the business. These items have a credit balance and increase total equity.

Expense accounts, on the other hand, represent the resources used to generate income. These items have a debit balance and lower total equity.

At the end of each accounting period, the revenue and expense accounts are closed to either the income summary account, retained earnings account, or capital account depending on the type of organization.

Account Type

Because there is so much variety when thinking about accounts we give each one a type that will determine where the account appears in different reports and how it can be used when entering income, expenses, payments and transfers.

Account Number

Account numbers are a type of short-hand for naming accounts. Accountants do a lot of data entry using the number pad on the keyboard and it is much easier to punch in a 4-digit number than it is to use the main part of the keyboard and spell it out.

Account numbers are organized so that the left-most digits represent what part of the balance sheet it is located on and the right-most digits determine what order the accounts in that section are shown.

Account Statements

This statement of transactions is the record of the growth and development, or the shrinking and amortization, of almost anything quantifiable. Financial institutions issue account statements to holders on a regular basis; these contain a summary of debits and credits within a given statement period. Countries, corporations and other entities use financial accounts, current accounts, capital accounts and others to measure and track payments, transfers, trade and assets of all kinds, including liquid assets, trademarks, drilling rights, intellectual property, goods produced and more.

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