The single most important thing to understand in accounting is: Everything is an account!
In the world of accounting, everything is an account, whether it is a bank accounts, credit card accounts, deposit accounts, petrol, sales, loan, VAT, depreciation, stationery, telephone, rent, profit and loss etc.
They are all accounts.
So, what exactly is an account?
It is a way of tracking money.
The second most important thing to understand is that there are no special accounts.
Every account does the same thing.
It records the flow of money.
There are conventions for naming accounts, for example, accumulated depreciation account but once you understand that all accounts are the same, it will really help you get your head around the subject.
To summarize:
· Accounts track the flow of money
· Accounts have a meaningful name
· Accounts have a balance (which shows how much is there, how much is owed, how much is spent, how much is earned etc.)
So, what do we do with these accounts?
First we need a place to show them - it is called the Chart of Accounts.
It is a list ( with a structure) of all the accounts used in a business.
The most basic structure of a set of accounts is to group them into assets and liabilities.
Always remember that in the ‘business’ there is also the ‘owner of the business’ - a separate entity form an individual itself.
There are 2 reasons you need to understand this:
1. Being a separate entity allows us to make better business decisions: good or not for the business
1. Accounts are split into groups. The basic groups are assets and liabilities:
· Assets are things the business owns (e.g. a vehicle, premises, computer and other equipment)
· Liabilities are things the business owes (e.g. loans, overdrafts, tax). The emphasis here is on the business.
The business also owes the owner of the business something - this is called Equity.
The most common way to see them is to look at a balance sheet - a list of accounts split into groups : Assets, Liabilities and Equity.
There are 2 important things to note about an account:
1. Its name
2. Where it is placed in the account structure
The core element of any bookkeeping/accounting system is an account.
All accounts are the same (there are no special cases).
All accounts record the flow of money.
There is need to structure these accounts into groups to represent what the business owns and what it owes.
Task 1: Write out a list of accounts (bank, sales, expense)
What matters is the name that exactly matches what it is they do for example, ‘Bank’ (your actual bank )
Another example is Consultancy Work :
does that mean money you have received from work ?
or
is it an expense for consulting work you have had done for you?
Hint:
If you are already in business, just look at all the things that either cost you money or where you get money from.
These are your accounts.
Task 2: Structure your accounts into Assets and Liabilities
(Equity is just another liability of the business)
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