What is account?

TR DEO
7.1 Introduction
◼ On any day in any business, there will be a great many financial
transactions taking place.
◼ In order to make sense or understand what is happening in the business it
is necessary to categorise and sort similar transactions together into
groups. In financial accounting however the term "category" is not used
and instead the term "account" is used.
◼ The word account is often abbreviated to "a/c" and thus you will see
"Sales a/c" and "Wages a/c".
◼ It may help you to think of "Accounts" as pigeon
holes such as in the following illustration.
◼ Every time a Sales transaction occurs, you must
put information about the transaction into the
pigeon hole for SALES.
◼ Similarly every time the Electricity bill arrives,
you must put the cost details into the pigeon hole
for ELECTRICITY.
◼ Then when the time comes to prepare the
financial statements, it is a matter of adding up all
the transactions in the various pigeon holes.
Five broad classes of Account
◼ Assets - Includes accounts that summarise the value of items owned by a business (for example land,
motor vehicles, building, equipment, office furniture, stock)
◼ Liabilities - Includes accounts that summarise the amounts owed by the business to external
parties (for example loans from banks or finance companies, mortgage on buildings and also in the
shorter term - unpaid bills)
◼ Expenses - Includes accounts that summarise the outflow of money from a business or the loss or
wastage of the business’s resources. For example money is spent purchasing stock for resale, and on
telephone, electricity, rent, rates, wages and motor vehicle expenses).
◼ Revenue - Includes accounts that summarise the inflow of money into a business resulting from the sale
of inventories, services performed and general operations of the business (for example sales, rent
received, commission received).
◼ Ownership /Equity - This is the owner’s investment or interest in the business. Ownership equity can
always be worked out as the difference between the total of assets less the total of liabilities.
Double Entry

◼ every financial transaction there are two effects – one debit effect and
one credit effect.
◼ Every debit should have a corresponding credit and Every credit should have a
corresponding debit.

◼ Debit is receiver (in person account), what came in(in non-person account), expense
◼ Credit is giver (in person account), what go out( in non-person account), Income
Tips
◼ Always remember the following steps.
1.To identify the account involved.
2.To identify the accounting “receiving” and therefore is to
be debited.
3.To identify the account “giving” and therefore is to be
credited.