What is an account? A beginner’s guide

Study Zone Institute 2 days ago Business and Accounting Basics

Let’s break down what an “account” means in business and accounting. Imagine a company has many different things it owns, and different things it owes to others. To keep track of all of these, we use “accounts”.

An account is like a special page or folder in a book (called a ledger) where we record changes to a specific item. For example, a company will have a “Cash” account to track all the money coming in and going out. It will also have accounts for things like “Inventory” (goods for sale), “Accounts Payable” (money owed to suppliers), and many more.

One account ‘gives’, another account ‘receives’

When a business does something that involves money or value, it’s called a “transaction”. A transaction is simply an exchange. For example, if a company sells goods to a customer for cash, that’s a transaction. In every transaction, at least two accounts are involved.

One account “gives” something, and another account “receives” something. In our example, the “Cash” account receives the money, and the “Sales Revenue” account records the value of goods given to the customer.

To understand how these accounts work, we group them into a few types. Traditionally, there are three types of accounts:

Real accounts: These accounts relate to things that exist physically or have a lasting value. Examples include assets like “Land”, “Buildings”, “Machinery”, and “Cash”. They also include liabilities like “Loans Payable”.

Personal accounts: These accounts relate to people or organisations. This could be customers (“Accounts Receivable” – money owed by customers), suppliers (“Accounts Payable” – money owed to suppliers), or even the owner of the business (“Capital”).

Nominal accounts: These accounts relate to revenues, expenses, gains, and losses. They do not have a lasting value and are closed at the end of an accounting period. Examples include “Sales Revenue”, “Salaries Expense”, “Rent Expense”, and “Interest Income”.

Another way to categorise accounts, which is very helpful, is using the acronym ALICE:

Assets: Things the business owns (like cash, inventory, equipment).

Liabilities: Things the business owes to others (like loans, accounts payable).

Income (or Revenue): Money the business earns from its operations (like sales revenue, service revenue).

Capital: The owner’s investment in the business.

Expenses: Costs the business incurs to generate income (like salaries, rent, utilities).

Understanding accounts is absolutely essential. It’s the foundation of all accounting and bookkeeping. If you want to be a business owner, you need to know how to track your resources (assets), debts (liabilities), and profitability (income and expenses). If you want to work as a bookkeeper or accountant, you’ll be working with accounts every single day, recording transactions and preparing financial reports. A solid grasp of accounts is the first step towards a successful future in the world of business.

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