An account can be defined as an individual record in the general ledger of an asset, equity, liability, income, and expenditure in an organized manner. For example, a business entity will have a bank account in its chart of accounts in which every transaction involving a bank is recorded. A company purchasing goods on credit will record these purchases in an inventory account and trade payables account. These accounts play a key role in the preparation of financial statements.
Types of Accounts
There are five main types of accounts. Each of these is represented in the expanded accounting equation which is mentioned below:
Assets= Equity + Liabilities + Income – Expenditures
Assets are resources that an entity uses to generate revenues. Asset accounts are of debit nature and are presented on the statement of financial position
Liabilities represent the obligation of the company to pay to creditors. This can also include bank debt as well as loans from owners. Liability accounts are of a credit nature and appear on the statement of financial position.
These accounts represent the owners’ interest in the entity. Equity accounts are of a credit nature and appear on the statement of financial position.
These accounts are used for recording the income generated by the business. Revenue accounts are of a credit nature and appear on the statement of comprehensive income.
These accounts are used for representing resources used for generating income. Expenditure accounts are of debit nature and appear on the statement of comprehensive income.