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The raw data of accounting are the business transactions. A business may engage in thousands of transactions during a period of time. The data in these transactions must be classified and summarized before becoming useful information. Making the accountant's task somewhat easier is the fact that most business transactions are repetitive in nature and can be classified into groups having common characteristics.
An account is an element in an accounting system that is used to classify and summarize money measurements of business activities of a similar nature. An account is set up whenever it is necessary to provide useful information about a particular business item. The number of accounts in a company’s accounting system depends on the information needed by those interested in the business.
Accountants may differ on the account title (or name) they give for the same item. The account title should be logical to help the accountant group similar transactions into the same account. Once an account is given a title, that same title must be used throughout the accounting records.
Accounts may take on a variety of formats. Some accounts are printed, and entries are written in by hand; others are on magnetic tape, and "invisible" entries are encoded by a computer. Every account format must provide for increases and decreases in the item for which the account was established. Once a business event is recognized as a business transaction, it is analyzed to determine its increase or decrease effect on the assets, liabilities, owner’s equity, revenues, or expenses of the business. These increase or decrease effects are then translated into debits and credits. Then the account balance (the difference between the increases and decreases) can be determined.
In each business transaction is the activity that is recorded. The total dollar amount of debits must equal the total dollar amount of credits. The accounting requirement that each transaction must be recorded by an entry that has equal debits and credits is called the double-entry procedure, or duality. This double entry procedure keeps the accounting equation – Assets = Liabilities+ Owner’s equity -- in balance.
To understand how the increases and decreases in an account are recorded, accountants use the T-account, which derives its name from the fact that it looks like the letter T. The title (name) of the item accounted for, such as cash, is written across the top of the T. Increases are recorded on one side of the vertical line of the T, and decreases on the other side, depending on the type of account. A T-account appears as follows:
Title of account
The accountant uses the term debit (or charge) instead of saying "place an entry on the left side of the T-account" and credit for "place an entry on the right side of the T-account". Thus, for any account, the left side is the debit side, and the right side is the credit side. A synonym for «debit an account» is «charge an account».
1. What is an account?
2. When is an account set up?
3. What does the number of accounts depend on?
4. What must every account format provide for?
5. What is debit?
6. What is credit?
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