An account is a storage unit used to record increases and decreases in various accounting elements. Accounts represent specific items that make up the major elements of accounting.
- Definition of account
- Examples of accounts
- Parts of an account
- Using debits and credits
- Types of accounts
- Difference between account and ledger
Examples of Accounts
Accounts represent specific items that make up the major accounting elements -- assets, liabilities, and capital. Under each accounting element are sub-classifications; the most specific of which are known as accounts. Here are a few examples of the most common account titles used.
Asset accounts include Cash on Hand, Cash in Bank, Petty Cash Fund, Accounts Receivable, Notes Receivable, Inventory, Prepaid Rent, Land, Building, etc. Liability accounts include Accounts Payable, Notes Payable, Utilities Payable, Interest Payable, Rent Payable, Loans Payable, etc. Capital is affected by four major items: owner contributions, withdrawals or dividends, revenues such as Sales, Service Revenue, Interest Income, etc.; and Expenses such as Salary Expense, Rent Expense, Interest Expense, Utilities Expense, and others.
There are a lot of different accounts and the account titles used by companies vary. It depends upon the type of business, industry, geographical and social influence, and preference of the company. A full list of the accounts used by a company is documented in its "Chart of Accounts".
Parts of an Account
Every account has three major parts: an account title, a debit side, and a credit side. The debit side is on the left, while the credit side is on the right. Example:
|Cash on Hand|
The above is the simplest form of an account, know as T-account. More detailed forms may be used such as those that include fields for account number, date, particulars or description, and posting reference which allows cross-referencing with other records or books.
|Account #1001 - Cash on Hand|
Using Debits and Credits
For asset accounts, placing an amount on the debit side increases the account. Placing an item on the credit side decreases the account.
The opposite applies to liabilities and capital. To increase a liability or a capital account, it is credited. Placing an amount on the debit side decreases the account.
Since contributions and revenues increase capital, they are credited (same as the side to increase capital). Withdrawals and expenses decrease capital, hence are debited when recorded.
Types of Accounts
Nominal accounts. Also known as temporary accounts, nominal accounts include revenue accounts, expense accounts, and withdrawal accounts. These are measured form period to period and are closed at the end of the period so as not to be mixed with the next period's records.
Real accounts. Also known as permanent accounts, real accounts include asset, liability, and capital accounts. These are the accounts found in the balance sheet. They are not closed at the end of every accounting period, hence are measured cumulatively.
Mixed accounts. Mixed accounts contain both the features of nominal and real accounts. They are split into nominal and real accounts when adjusting entries are prepared at the end of the accounting period. Examples are: Office Supplies that still consists of used and unused supplies, Prepaid Insurance that still includes the expired and unexpired portion, etc.
What is the difference between an account and a ledger?
An account is a specific item that make up the major elements of accounting. A ledger is a book, paper or electronic, that processes and keeps all accounts and information about the amounts debited and credited to each account. In other words, all accounts are maintained in the ledger.