Introduction to Accounts

Introduction to Accounts

• Accounts are fundamental to financial accounting
• Each transaction affects one or more accounts
• A chart of accounts organizes accounts

Specific Objectives

• Students will be able to discuss the five major accounts.
• Students will be able to give examples of each account type.
• Students will be able to create a chart of accounts.

Account Definition

• An account records increases and decreases in assets, liabilities, equity, income, or expenses.
• Accounts are categorized and tracked using names and numbers.
• Accounts are recorded in the general ledger.
• A T-account visually represents an account (using a T shape).
• The T-account has:
  • Account title
  • Debit side (left side)
  • Credit side (right side)

Major Accounts

• The five major accounts are elements of the financial statements.
• They are part of the expanded accounting equation.

Assets

• Assets are company resources that result from past events
• They provide future economic benefits
• Assets are used to generate revenue
  • Current assets can be converted to cash in a year
  • Non-current assets cannot be realized in a year
    • Tangible: physical assets (land, buildings, equipment, etc.)
    • Intangible: non-physical assets (patents, trademarks, goodwill)

Liabilities

• Liabilities are present obligations
• They result from past events
• Liabilities require giving up resources to settle them

Equity

• Equity is assets minus liabilities
• It represents the owner's interest in the company

Income

• Income is an increase in economic benefits
• Recorded in the income statement
• Income includes revenue and gains.
  • Revenue: ordinary activities (e.g., sales, service fees)
  • Gains: other income

Expenses

• Expenses are decreases in economic benefits
• Recorded in the income statement
• Expenses include expenses and losses.
  • Ordinary activities (e.g. salaries, rent)
  • Losses

Classification of Major Accounts

• Accounts are classified based on where they appear in the financial statements:
  • Balance Sheet Accounts (assets, liabilities, equity)
  • Income Statement Accounts (income, expenses)

Chart of Accounts

• A chart of accounts lists all accounts in the general ledger.
• Accounts are numbered for easy organization
  • First digit specifies account type (1 = assets, 2 = liabilities, 3 = equity, etc.)

Account Numbering System

• A 3-digit numbering system is used:
  • First digit: major account type (e.g. 1 for assets, 2 for liabilities)
  • Second digit: order/sequence of accounts within the major type
  • Third digit: often signifies sub-accounts.
• Example: Asset Account: Account Receivable (110), Cash (120)

Common Account Titles and Descriptions

• Account titles are descriptions of the specific details.
• Common titles include accounts receivable, cash, inventory, etc.
• Descriptions explain what the account represents (e.g., cash, accounts payable)

This quiz covers the fundamentals of accounts in financial accounting. Students will learn about the five major accounts, their definitions, and how to create a chart of accounts. Get ready to understand how transactions impact various types of accounts.