Account
Encyclopedia
Accounting is a systematic way to record transactions.
An Account (in bookkeeping
) refers to assets, liabilities, income
, expenses, and equity
, as represented by individual ledger
pages, to which changes in value are chronologically recorded with debit and credit
entries. These entries, referred to as postings, become part of a book of final entry or ledger
. Examples of common financial accounts are cash
, accounts receivable
, mortgages, loans, PP&E, common stock
, sales
, services, wages, and payroll
.
A chart of accounts
provides a listing of all financial accounts used by particular business, organization, or government agency.
The system of recording, verifying, and reporting such information is called accounting. Practitioners of accounting are called accountants.
Example: A sales account is opened for recording the sales of goods or services and at the end of the financial period the total sales are transferred to the revenue statement account (Profit and Loss Account or Income and Expenditure Account).
Similarly expenses during the financial period are recorded using the respective Expense accounts, which are also transferred to the revenue statement account. The net positive or negative balance (profit or loss) of the revenue statement account is transferred to reserves or capital account as the case may be.
The further classification of accounts is based on the periodicity of their inflows or outflows in the context of the fiscal year.
Income is immediate inflow during the fiscal year.
Expense is the immediate outflow during the fiscal year.
An asset is a long-term inflow with implications extending beyond the financial period and by the traditional view could represent unclaimed income. Alternatively, an asset could be valued at the present value of its future inflows.
Liability is long term outflow with implications extending beyond the financial period and by the traditional view could represent unamortised expense. Alternatively, a liability could be valued at the present value of future outflows.
Items in accounts are classified into five broad groups, also known as the elements of the accounts: Asset
, Liability
, Equity, Revenue
, Expense
.
The classification of Equity as a distinctive element for classification of accounts is disputable on account of the "Entity concept
", since for the objective analysis of the financial results of any entity the external liabilities of the entity should not be distinguished from any contribution by the shareholders.
An Account (in bookkeeping
Bookkeeping
Bookkeeping is the recording of financial transactions. Transactions include sales, purchases, income, receipts and payments by an individual or organization. Bookkeeping is usually performed by a bookkeeper. Bookkeeping should not be confused with accounting. The accounting process is usually...
) refers to assets, liabilities, income
Income
Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
, expenses, and equity
Equity (finance)
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...
, as represented by individual ledger
Ledger
A ledger is the principal book or computer file for recording and totaling monetary transactions by account, with debits and credits in separate columns and a beginning balance and ending balance for each account. The ledger is a permanent summary of all amounts entered in supporting journals which...
pages, to which changes in value are chronologically recorded with debit and credit
Debits and credits
Debit and credit are the two aspects of every financial transaction. Their use and implication is the fundamental concept in the double-entry bookkeeping system, in which every debit transaction must have a corresponding credit transaction and vice versa.Debits and credits are a system of notation...
entries. These entries, referred to as postings, become part of a book of final entry or ledger
General ledger
The main accounting record of a business which uses double-entry bookkeeping. It will usually include accounts for such items as current assets, fixed assets, liabilities, revenue and expense items, gains and losses. Each General Ledger is divided into debits and credits sections. The left hand...
. Examples of common financial accounts are cash
Cash
In common language cash refers to money in the physical form of currency, such as banknotes and coins.In bookkeeping and finance, cash refers to current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately...
, accounts receivable
Accounts receivable
Accounts receivable also known as Debtors, is money owed to a business by its clients and shown on its Balance Sheet as an asset...
, mortgages, loans, PP&E, common stock
Common stock
Common stock is a form of corporate equity ownership, a type of security. It is called "common" to distinguish it from preferred stock. In the event of bankruptcy, common stock investors receive their funds after preferred stock holders, bondholders, creditors, etc...
, sales
Sales
A sale is the act of selling a product or service in return for money or other compensation. It is an act of completion of a commercial activity....
, services, wages, and payroll
Payroll
In a company, payroll is the sum of all financial records of salaries for an employee, wages, bonuses and deductions. In accounting, payroll refers to the amount paid to employees for services they provided during a certain period of time. Payroll plays a major role in a company for several reasons...
.
A chart of accounts
Chart of accounts
__FORCETOC__A chart of accounts is a created list of the accounts used by a business entity to define each class of items for which money or the equivalent is spent or received...
provides a listing of all financial accounts used by particular business, organization, or government agency.
The system of recording, verifying, and reporting such information is called accounting. Practitioners of accounting are called accountants.
Based on nature
An account may be classified as real, personal or as a nominal account| Type | Represent | Examples |
|---|---|---|
| Real | Physically tangible things in the real world and certain intangible things not having any physical existence | Tangibles - Plant and Machinery, Furniture and Fixtures, Computers and Information Processing Equipment etc. Intangibles -Goodwill Goodwill (accounting) Goodwill is an accounting concept meaning the value of an entity over and above the value of its assets. The term was originally used in accounting to express the intangible but quantifiable "prudent value" of an ongoing business beyond its assets, resulting perhaps because the reputation the firm... , Patents and Copyrights |
| Personal | Business and Legal Entities Incorporation (business) Incorporation is the forming of a new corporation . The corporation may be a business, a non-profit organisation, sports club, or a government of a new city or town... |
Individuals, Partnership Firms, Corporate entities, Non-Profit Organizations Non-profit organization Nonprofit organization is neither a legal nor technical definition but generally refers to an organization that uses surplus revenues to achieve its goals, rather than distributing them as profit or dividends... , any local or statutory bodies Statutory Corporation A statutory corporation or public body is a corporation created by statute. While artificial legal personality is almost always the result of statutory intervention, a statutory corporation does not include corporations owned by shareholders whose legal personality derives from being registered... including governments at country, state or local levels |
| Nominal | Temporary Income and Expenditure Accounts for recognition of the implications of the financial transactions during each fiscal year till finalisation of accounts at the end | Sales, Purchases, Electricity Charges |
Example: A sales account is opened for recording the sales of goods or services and at the end of the financial period the total sales are transferred to the revenue statement account (Profit and Loss Account or Income and Expenditure Account).
Similarly expenses during the financial period are recorded using the respective Expense accounts, which are also transferred to the revenue statement account. The net positive or negative balance (profit or loss) of the revenue statement account is transferred to reserves or capital account as the case may be.
Based on periodicity of flow
The classification of accounts into real, personal and nominal is based on their nature i.e. physical asset, liability, juristic entity or financial transaction.The further classification of accounts is based on the periodicity of their inflows or outflows in the context of the fiscal year.
Income is immediate inflow during the fiscal year.
Expense is the immediate outflow during the fiscal year.
An asset is a long-term inflow with implications extending beyond the financial period and by the traditional view could represent unclaimed income. Alternatively, an asset could be valued at the present value of its future inflows.
Liability is long term outflow with implications extending beyond the financial period and by the traditional view could represent unamortised expense. Alternatively, a liability could be valued at the present value of future outflows.
| Type of accounts | Long term inflows | Long term outflows | Short term inflows | Short term outflows |
|---|---|---|---|---|
| Real accounts | Assets | |||
| Personal accounts | Assets | Liability | ||
| Nominal accounts | Incomes | Expenses |
Items in accounts are classified into five broad groups, also known as the elements of the accounts: Asset
Asset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
, Liability
Liability (financial accounting)
In financial accounting, a liability is defined as an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.A liability is defined by the...
, Equity, Revenue
Revenue
In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....
, Expense
Expense
In common usage, an expense or expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or an automobile is often...
.
The classification of Equity as a distinctive element for classification of accounts is disputable on account of the "Entity concept
Entity concept
In accounting we treat a business or an organization and its owners as two separately identifiable parties. This concept is called business entity concept....
", since for the objective analysis of the financial results of any entity the external liabilities of the entity should not be distinguished from any contribution by the shareholders.