Definition: An account is a record in an accounting system that tracks the financial activities of a specific asset, liability, equity, revenue, or expense. These records increase and decrease as the business events occur throughout the accounting period. Each individual account is stored in the general ledger and used to prepare the financial statements at the end of an accounting period.
What Does Account Mean?
What is the definition of account? There are five main types of accounts used in an accounting system. Each of these are represented in the expanded accounting equation. Assets = Liabilities + Owner’s Equity + Revenues – Expenses.
Let’s take a look at an example of each
Example
Assets are resources that the company can use to generate revenues in current and future years. Asset accounts have a debit balance and are always presented on the balance sheet first.
Liabilities represent the debt obligations that the company owes to creditors. This can include bank debt as well as notes from owners. Liability accounts have a credit balance and appear below assets on the balance sheet.
Equity accounts represent the owner’s stake in the business. Equity is often called net assets because it shows the amount of assets that the owners actually own after the creditors have been paid off. You can calculate this by flipping the accounting equation around to solve for equity instead of assets.
Revenue and expense accounts are technically both temporary equity accounts, but they are significant enough to mention separately. Revenue accounts track the income generated by the business. These items have a credit balance and increase total equity.
Expense accounts, on the other hand, represent the resources used to generate income. These items have a debit balance and lower total equity.
At the end of each accounting period, the revenue and expense accounts are closed to either the income summary account, retained earnings account, or capital account depending on the type of organization.
Summary Definition
Define Account: Accounts are records of business transactions in categoried on the basis of the accounting equation.
