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. A complete list of accounts used by the business for accounting purposes is called a 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 a certain accounting period. Since the information in the financial statements is classified into assets, liabilities, equity, revenue and expenses, each type of these items has a separate account.
For example, cash in the bank, petty cash, accounts receivable, accounts payable, share capital, sales revenue, administrative expenses, and cost of goods sold - all accounting data categories will have their own separate account. It is the simplistic way we can say that each account has a T form, since it has two sides. The left side is called the Debit side. The right side is called the Credit side. Also, each account has a title. You can see simplified illustrations further. Debit and Credit sides of the accounts are used to reflect either increase or decrease in the balance of certain accounts. All the accounts, except for revenue and expenses accounts, will have balances on the Debit or credit side, depending on the category of account at the beginning and end of each accounting period. In case we have accounts belonging to the category of assets, the increase in balances of these accounts is recorded on the Debit side and decreases on the Credit side.
These accounts will have debit balances at the beginning and at the end of the accounting period. If we have accounts belonging to the category of equity or liabilities, an increase in the balances of these accounts is recorded on the Credit side, a decrease - on the Debit side. These accounts will have a credit balance at the beginning and the end of the accounting period. If we have accounts belonging to the revenue category, the increase in revenue accounts is reflected on the Credit side and decreases on the Debit. For expenses accounts, it is vice versa. An important aspect to remember is that revenue and expenses accounts will not have an opening or closing balance. These accounts are used only for certain accounting periods and are closed by transferring the balance accumulated during the period to the Retained Earnings account. While a 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.
