In this article, we will learn in-depth about the concept of accounts, including its definition, features, purposes or objectives, classification, formats, and much more.
What is an Account?
An account is a ledger record that summarizes all of the transactions that have occurred with a specific person or object.
Everyone wants to know the financial condition and the financial results of the organization at a certain time. In order to know these financial results, all transactions must be recorded in a disciplined and proper manner.
The summary and a brief statement of these transactions are called the Account.
The English word “Account” originated from the old French word “Accounter,” which means to count or calculate. In a hierarchical sense, the account is the statement of deposits and expenditure.
According to the accounting language, the account is a brief statement of homogeneous transactions.
For example, Furniture purchased as cash $8,000. Here are two accounts that are involved. Furniture Account and Cash Account.
Purchase A/c, Sales A/c, Capital A/c, Debtors A/c, Creditors A/c, Salary A/c, Land A/c, etc. are the example of accounts.
6 Important Features or Characteristics of Account
The 6 important features or characteristics of the account are as follows:
- Each account has a specific heading. For example, Salary a/c, Debtor a/c, Sales a/c, Creditor a/c.
- Each account has a specific format.
- Transactions occurring in the organization are classified according to their nature and recorded under a specific heading.
- There is a reflection of the dual entity.
- Each account has a reference to when a transaction takes place.
- The account balance must be calculated immediately after each transaction is recorded in a modern format.
9 Important Purposes or Objectives of Account
The 9 important purposes or objectives of the account are as follows:
- keep track of transactions on a long-term basis.
- Assist to determine the profitability of the business.
- Help to prevent fraud and falsity in the organization.
- Help to reduce costs of organizations by reducing unnecessary expenses.
- The account book serves as a proof document to ensure that each transaction is clear and properly recorded.
- Help accurately assess the financial results of the organization.
- Assist in the preparation of financial statements of the organization.
- Help in determining the amount of income, expenses, debt, and assets of the organization.
- Assist management in planning for the organization.
Classification of Account
There are two methods of classification of account:
- Traditional Method
- Modern Method
The table below shows the classification of accounts in the traditional method.
i. Personal Accounts:
Personal accounts are accounts that are associated with individuals or organizations. For example, Bank account, Harry account, Stephen College account, etc.
Personal accounts can be divided into two categories.
- Debtor Accounts
- Creditor Accounts
Debtor accounts are personal accounts from which the company or accounting unit is entitled to collect credit.
For example, if the organization sells goods on credit to William, William is the organization’s debtor.
2. Creditor Accounts:
Creditor accounts are personal accounts to whom money must be paid by the organization or accounting unit.
For example, if the organization purchased goods from Allen on credit, Allen is the organization’s creditor.
ii. Impersonal Accounts:
Impersonal accounts are any accounts that aren’t associated with a particular person or business.
There are two types of impersonal accounts:
- Real or Property Accounts and
- Nominal Account or Income-Expenditure Account
1.Real or Property Account:
An account relating to the property is called a real or property account. For Example, Building A/c, Furniture A/c, Machinery A/c, etc.
2. Nominal Account
A nominal account refers to the business’s profit-loss account, income-expenditure account, etc.
For example, wage account, salary account, advertising account, etc.
Nominal accounts have no real existence, they are nominal. In modern times these are known as ownership accounts because they cause a decrease or increase in ownership.
There are two types of nominal accounts.
i. Revenue-Related Account:
A revenue-related account refers to the transaction from which the organization’s revenue grows.
For example, Sales Revenue a/c, Commission received a/c, interest received a/c, etc.
ii. Expenditure-Related Account:
An expenditure-related account refers to the transaction from which the organization’s expenditure grows.
For example, salary a/c, Rent a/c, wages a/c, etc.
Personal accounts are divided into three categories by nature:
- Nominal Personal Accounts
- Legal or Artificial Personal accounts
- Representative Personal Accounts
1.Normal Personal Accounts:
The normal personal account means the account of a person made of normal blood and flesh.
For example, Alisha account, Matt account, etc.
2. Legal or Artificial Personal Accounts:
The person or organization created by law is called an artificial personal account.
For example, XYZ Limited, Citi bank, etc.
3. Representative Personal Accounts:
Accounts representing the name of a person or organization are called representative personal accounts.
For example, advance salary account, arrears of wages account, etc.
2. Modern or Accounting Equation Method
According to the Accounting Equation method, accounts can be classified as follows:
- Asset Account: Land A/c, Furniture A/c, Building A/c, Investment A/c, Debtors A/c
- Liability Account: Bank overdraft A/c, Creditors A/c, Note Payable A/c
- Capital Account: Owner’s Capital A/c
- Revenue Account: Sales A/c, Service Revenue A/c, Interest Income A/c
- Expense Account: Salary A/c, Rent A/c, Interest A/c
- Drawings Account: Owner’s Drawing A/c
You can also read
- What is a Transaction? Features of Transaction
- What is Accounting? Father of Accounting. Evolution of Accounting
Format of Accounts
The specific format that is used to maintain a good and proper account is called the Account format.
There are usually two types of formats.
1. T-Format or Common Format
Features of “T Format”:
- Each account will have a title.
- There are two parts: debit and credit.
- There will be a total of 4 columns, including four in the Debit section and four in the Credit section.
- The balance is calculated at the end of the period.
- The account will have a code number.
2. Modern Format or Running Format
Features of Modern Format:
- Each account will have a title.
- The number of columns will be Five (5)
- The account balance is to be extracted immediately after each transaction is recorded.
- Debit and credit amount columns stand side by side.
- Each account has a code number.
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