An account is a means of accumulating in one place all the financial and operational information about changes in a specific business area such as liabilities, assets and owner's equity. By becoming aware of, and implementing, the basic functions of an account, you will be able to increase your firm's productivity, efficiency and success. Every transaction that your firm does affects an account in one way or another.
Recording business transactions is a basic function of accounts in business. Properly recording transactions lets business owners know account balances, customer payment and purchase history and the success or failure of different business areas. Each transaction consists of a debit and a credit, otherwise known as a “T” account, according to accountingcoach.com. Proper recording and maintenance of business records is required by governmental taxing authorities. Recording financial transactions gives the firm a realistic picture of where it stands financially and operationally.
One of the basic functions of accounts in business involves properly classifying the business transactions. Each account is assigned an account number, according to Meigs & Meigs. These account numbers are what makes up a company's chart of accounts. These unique numbers are used to classify accounts according to how they affect the company. Classifying accounts properly allows for quick summarization and analysis of individual account information.
Summarizing financial transactions is a basic function of accounts in a business. By summarizing information, according to Meigs & Meigs, business owners can save time and increase efficiency of operations. Summarizing accounts results in an ending balance that is used to prepare the firm's financial statements and other financial documents. This information can be used in planning future operations and other business decision-making areas.
Many benefits are received from the basic functions of accounts in business. By recording transactions that occur, the company can keep track of customer and vendor transactions. Accounts will be current and up to date while providing realistic information, according to accountingcoach.com. The firm can also avoid confrontations with the IRS, which requires proper recordkeeping done in a timely manner. By summarizing and classifying accounts, the firm can assess financial information at time without shifting through multitudes of detailed transactions.
Types of accounts in business include: revenue, expense, asset, liabilities and owner's equity. All accounts and their ending period balances are found on financial statements.
Revenues and expenses are found on income statements, sometimes known as profit and loss statements. Revenues are defined as a firm's sources of income. Expenses are the firm's outlays of resources. The difference between revenue and expense accounts functions as either a net income or net loss.
Assets, liabilities and equity accounts are found on the balance sheet. Assets are items the firm owns and is entitled to. Liabilities are items the firm has legal obligations to. Equity accounts, according to Meigs & Meigs, are defined as the difference between assets and liability accounts.