The purpose of accounting is to keep track of and summarize information about the business’s finances to the various people who require such information, it is essential to have the right tools and methods to achieve this purpose. One way is known as account, and it is among the most crucial accounting terms. Let’s look at its fundamentals and the practical need.Boekhouder ZZP Amsterdam
Accounts help keep track of records and record information on every equity, liability, asset, expenses and revenue. The complete list of accounts utilized by the business to track accounting purposes is known as the general ledger. This may differ based upon the amount, the purpose and other specifics of the company. Accounts are used to categorize financial information into categories and maintain all necessary details about what transpired in each category in the specific accounting period. The information in financial statements is divided into liabilities, assets, equity revenues and expenses each of these items is allocated a distinct accounts.
Structure and Example
For instance, bank cash or petty cash account receivables and shares capital, accounts payable sales revenue, administration costs cost of goods sold each of these categories of accounting data will be able to have their own account. What is the structure of the account? In a simple way, to say that every account has a T shape as the account has 2 sides. Left side is known as the debit side. Right side is known as Credit side. Additionally, each account is given the name. The illustration is simplified further.
Reduces and Increases in Balances
The debit and credit sides of the account are used to indicate the increase or decrease within the account balance. a particular accounts. The beginning and the ending of each accounting period, every account, with the exception for the expense and revenue accounts, will be in balance either on the credit or debit side, based on the account type.
If you have accounts in this category, the assets, the increase in balances for the accounts is recorded on the debit side, while decreases are recorded on the credit side. The accounts will be debit balances at the beginning and then at the close each accounting cycle. In the event that you have accounts in the category of debt or equity The increase in the balances of the accounts is recorded on the credit side and reductions are recorded on the debit side. These accounts will have a credit balance at the beginning of and at the close each accounting cycle. If there are accounts that fall under the revenue category, growth in revenue accounts will be reflected on the credit side, while the decline on debit. In the case of expenses accounts, it’s the reverse. It is crucial to keep in mind that the accounts for expenses and revenue do not have balances for closing or opening as they are only used for a specific periods of time and then closed by transfer of the balance that was accumulated over the period to the Retained Earnings account.
Double Entry Principle
If a the business transaction is recorded it will always have an impact on at minimum two accounts. So one account gets debited while another is charged. This type of accounting practice is known as double entry accounting.