Accounts are fundamentals of financial reporting. The chart of accounts is where bookkeeping starts, and the trial balance can only be prepared once the chart of accounts is ready. However, what is the definition of an account?
An account recorded all movements caused by business (Also see Why Does Every Business Need an Accountant?) transactions done by the company. An account is like a diary but maintained in monetary form. As an example, the asset account records all the movements in assets, such as asset purchases, disposal, writing off or revaluation.
Accounts are usually named and numbered in an orderly manner in the accounting system to make things easily trackable. However, accounts would also have sub-accounts. An instance, the motor vehicle account and account receivable are the sub-accounts of the main asset account, while the account payable is a sub-account under the liability branch. If you’re not familiar with accounting (Also see What is the definition of an Accounting Equation?) , it might be worth contacting a professional accounting firm in Johor Bahru to assist you.
What are the Types of Accounts?
All accounts in the general ledger or chart of accounts are classified into seven main classes: asset, liability, equity, revenue, cost of sales, other income and expenses.
Asset accounts: An asset account has a debit balance and shows the sources of the company at its disposal. For example, cash, accounts receivable, inventory, motor vehicles, goodwill, etc.
Liability accounts: A liability account has a credit balance showing the money that the company owes to various other entities. For example, accrual expenses, accounts payable, unearned revenue, loans payable and many more.
Owner’s Equity accounts: An owner’s equity account also has a credit balance showing the business owner’s stake in the company.
Revenue accounts: A revenue account is where the company records its sales from its core operation, net of sales return and usually has a credit balance. For example, Sales of goods, revenue from services rendered etc.
Cost of sales accounts: The cost of sales account is used to record, usually, direct costs involved to generate sales and have a debit balance. For illustration, purchases, changes in inventories, carriage inward, direct labour cost etc.
Other income accounts: Other income account is where income from the non-core operation is recorded and normally has a credit balance. For instance, government grants, interest income and gain on disposal.
Expenses accounts: Expenses account has a debit balance and is used to show the expenses, normally indirect, incurred by the business in an ordinary course of business. For example, staff salary, insurance, rental etc.
What is the Accounting Format?
There are multiple techniques for structuring or displaying accounting records, but one of the prevalent methods is to utilize T-accounts. T-accounts arrange account balances by positioning credits on the right and debits (Also see What are Debits and Credits?) on the left-hand side. The account’s total balance is then calculated at the bottom. T-accounts also have a title or heading that indicates the account’s name and number.
Another way to present accounts is through a transaction list in the general ledger. Typically, the cash account may include all transaction lists that impacted the cash account. While the list format is ultimately effective, T-accounts are still easier to comprehend and utilize. Moreover, it is also useful in the accounting cycle before the preparation of trial balances.
