One of the basic fundamentals in accounting is understanding what accounts are. Without them, business transactions do not have a place in accounting. More so, it will be challenging to build an accounting system.
What is an account?
Accountants see an account as a page in a ledger. It can be utility bills, revenue, and bank accounts. We can say that an account is a record of a business event. For example, a company can withdraw 2 million Naira from its banker. This is a transaction or business event. When it occurs, bank and cash accounts will be used to record them. Therefore, we can say that an account is a record.
Before the use of technology in accounting, a ledger contained more than an account. To illustrate, the sales ledger contains the accounts of all business clients who owe the company. We will discuss ledgers in another article.
Importance of accounts
Double-entry principle:
To the accountant, accounts make it possible to apply the double-entry principle. In fact, there will be no basis for using technology to automate the accounting process.
Record keeping:
Accountants see accounts as a medium of recording transactions. As explained above, when business transactions occur, they are recorded based on names such as bank and sales accounts.
Preparing financial statements:
It is the accumulation of accounts for a period that accountants use to prepare financial statements. This is why we see it as the foundation of accounting.
Types of accounts
There are mainly two types of accounts. These are personal and impersonal accounts. This is a traditional way of classifying accounts. However, technology innovation has changed the way accountants classify accounts. We classify accounts based on how they will be presented in the financial statements. This is discussed in this article here.
Personal accounts
These are accounts that involve the names of persons and corporate bodies such as Bola, Oando, and First Bank accounts. So, whenever you see names of individuals and companies in a company's books, you can refer to them as personal records. Other types are equity, dividends, and drawings accounts
Impersonal accounts
As the name suggests, it accounts for non-personal items such as machinery, salary, and goodwill records. This is further divided into real, nominal, and intangible.
Real accounts are records for items we can see and touch. They include inventories, properties, plants and machinery. It is also referred to as tangible assets.
Nominal or general accounts are for items that cannot be classified as personal or real records. They are income and expense items. These include salaries, utilities, sales, purchases, and discount records. The list is not exhaustive.
Intangible accounts are records for items that cannot be seen or touched but which exist in the business, such as Goodwill.
Final words
To conclude, accountants see accounts as the foundation of bookkeeping. They are the source of data that finance professionals use in providing information to users. Without it, double-entry principle applications cannot be done.