What is an Account?
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 have a way of categorising or grouping similar transactions.
For example, a business owner will want to know the total of all sales or how much money he has spent on wages. Both sales and wages are categories of financial transactions.In financial accounting however the term “category” is not used and instead the term “account” is used. This is often abbreviated to “a/c”.
Thus you will see – “Sales a/c” and “Wages a/c”.
There are five broad classes of account:
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Assets |
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Liabilities |
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Expenses |
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Revenue |
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Ownership Equity |
These classes of accounts may be defined as follows:
| 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, 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: is the owner’s investment or interest in the business (it is the difference between the assets less the liabilities). |
| Ownership Equity |
In a non-profit organisation, ownership equity is usually stated as "Accumulated Member's Funds". In a normal (profit-making) company, ownership equity is usally stated as "Share Capital" |