Accounts in Accounting

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Definition:

Instead of using a plus or minus sign to indicate increase or decrease of an item, an account is prepared to show summarized record of transactions relating to a particular item or person.

A business may choose how many separate accounts, it needs. For example, it might combine electricity and gas charges into a single account ‘heating and lighting’. However, unless you are told otherwise, it is advised to maintain a separate account for each item having monetary value. Accounts may be prepared in two styles.

Types of Accounts in Accounting:

There are two types of accounts; one is “T” account and other is three column ledger account (running balance method). They are explained below:

(1) “T” Account, Definition, Format and Example:

“T” accounts vertically divide page of the ledger in two equal halves. As they look like the capital letter “T” so are called “T” accounts. This method of preparing accounts helps to save time, space, and effort. It is preferably used for the class room demonstration, practice and rough work.

The left half or left hand side is termed debit, abbreviated as (Dr) and the right side is credit, abbreviated as (Cr). However, in practice, bookkeepers do not normally show the terms debit (Dr) or Credit (Cr) at the top of the accounts as there is no need to give them a reminder about these rules. Each half is further sub divided into four sections.

  • Date column, to show date of the transaction.
  • Details column, to provide cross reference with regard to the other account(s) involved in the ledger.
  • Folio column, to provide additional reference of the item recorded in the account.
  • Amount column, to record the monetary value of the item debited or credited to the account.

 t-account-format

Because of double-entry mechanism, accountants record an accounting entry in a minimum of two T-accounts in order to envisage the complete impact of an accounting transaction on the accounting records.

t-account-example

(2) Three Column Ledger Account (Running Balance Method):

Definition and Format of Three Column Ledger Account:

In practice accounts are usually prepared in three column ledger account or running balance method, layout especially, when business uses an integrated computerized system. A familiar example of this form of account is a bank statement issued periodically by banks to their account holders. The major advantage of this form is that it shows the latest account balance at a glance. This form of account has six columns.

  • Date column, to show date of the transaction for both debt and credit entries.
  • Details column, to provide cross reference with regard to the other accounts involved in the ledger.
  • Folio column, to provide additional reference of the item recorded in the account.
  • Debit amount column, to record the monetary value of the item debited.
  • Credited amount column, to record the monetary value of the item credited.
  • Balance amount column, to show the net balance after each and every transaction, therefore this layout is called running balance method.

In manual accounting, this is time consuming and may lead to errors, however, using computerized accounting systems, balances are automatically calculated so there are less chances of errors.

format-of-three-column-ledger-account

The rules for debit and credit may be illustrated as:

format-of-three-column-ledger-account1

The above rules for debit and credit dictate that an increase in an asset account reflected by a debit entry will be matched by a credit entry in either a liability/capital account (Up-arrow in liability/capital) or in another asset account (Down-arrow in another asset). In both instances a debit entry gives rise to a credit entry which is the essence of double entry concept which states that every debit has a corresponding credit with same and equal amount. However this must be remembered that both debit and credit effects may occur in only one side of the accounting equation.

As increase in asset accounts require debit entry in asset accounts so, as a result, at any point of time asset would always have a debit balance. Whereas increase in liability/capital accounts requires credit entry in respective liability/capital accounts, so as a result at any point of time they would always have a credit balance.