Since the goal of accounting is always to records, summarize and offer financial data about business to numerous users of those data, you need to possess certain means to achieve this purpose. One of the means is called account which is considered the most significant accounting terms. Let us explore its essence and practical necessity.
Account keeps records and track information regarding every person asset, liability, equity, revenue and expense. Complete report on accounts employed by the organization for accounting purposes is called general ledger, which can be different with regards to the size, purpose as well as other particularities in the business. Accounts are employed to classify financial data into groups and every one of the appropriate information on what went lower fot it category through the certain accounting period. Since information inside the fiscal reports is classed into assets, liabilities, equity, revenue and expenses, every type of individuals products has separate account.
Structure And Example
For example profit bank, petty cash, accounts receivable, accounts payable, share capital, sales revenue, administrative expenses, cost of products offered – every one of these categories of accounting data might have a unique separate account. So what is the kind of account? It the simplistic approach we decide to try will easily notice, that each account features a T form, since it has two sides. Left side is called Debit side. Right side is called Credit side. Also each account features a title. You will see simplified illustration further.
Decreases And Increases In Balances
Debit and Credit sides in the accounts are employed to reflect either increase, or decrease in the quantity of certain account. In the beginning and finished of each and every accounting periods all the accounts, apart from revenue and expenses accounts, might have balances round the debit or credit side, with regards to the number of account.
In situation we have accounts from the number of assets increase in balances of individuals accounts is upon the Debit side, decrease – round the Credit side. These accounts might have debit balance in the beginning at the conclusion in the accounting period. In situation we have accounts from the number of equity or liabilities increase in the balances of individuals accounts is upon the borrowed funds side, decrease – round the Debit side. These accounts might have credit balance in the beginning as well as the finish in the accounting period. In situation we have accounts of revenue category, increase in revenue accounts is reflected on Credit side, decrease – on Debit. For expenses accounts it’s visa versa. Important factor to know that revenue and expenses accounts will not have opening or closing balances, because these accounts are employed only for certain accounting period and so are closed by transferring the quantity accrued through the period to Retained Earnings account.
Double Entry Principle
While business transaction is recorded, it impacts no less than two accounts. Therefore one account is debited and yet another account is credited. Such action in accounting terms is called double entry accounting.