Sandrene is an ACCA candidate pursuing a B.C Degree in Accounting and Finance with 5 years experience in Financial Services/Accounting.
If you want to remember something, you must first understand it
— Sandrene Bryan
What is an Account in Accounting?
A major part of accounting is recording business transactions. There are numerous different types of transactions that a business may undertake in its operations so in order to organize and manage the information, these transactions are recorded a specific way. A record is created for each kind of transaction, for example, Sales. This is called an Account (T-Account). In each account, entries are inputted to keep track of all activities of that account for a specific period. These Accounts/T-Accounts are placed into Six Main Categories:
Many students or beginners often complain they have a hard time remembering these Accounts and what that are. Is there a way to retain this information?
The DEALER Method
D - Drawings
E - Expenses
A - Assets
L - Liabilities
E - Equity
R - Revenue
This acronym has helped many people to master accounting and ace their exams. It works for me every time. You should try it!
Now let's look at what each of these Accounts are about.
From time to time, owners of the business may feel the need to withdraw some of the assets of the business for their personal use, which can be cash or other physical assets. This is normally referred to as Drawings. For example:
- Bob takes cash out of his restaurant's cash register to pay his personal water bill at home. This is a Cash Drawings
- Bob takes home a stove from the restaurant to replace the one he had at home. This is an example of Other Asset Drawings.
There are also times when business owners (usually shareholders) are paid a portion of the net income that the business makes. A Shareholder is a person or entity who owns shares in the company. The portion paid from Net Income is called a Dividend which is also considered to be a form of Drawings because it cannot be accounted for as an expense (to be explained next) since it is an allocation of Net Profit. For example; Apple Inc Pays its shareholders a dividend of $.20 per share. Therefore if you had 100 shares in Apple you would receive $20.00 as dividend.
Every business spends money or incurs costs during the process of its day to day operations of manufacturing products, making sales, delivering goods/services to customers, or handling queries. These types of costs are called expenses. Examples of expenses are Rent, Utilities, Salaries, Stationery, Interest Payments, Carriage Outwards, etc.
Assets are anything owned by the business and are used to make money or provide an immediate or future benefit to the business. Some assets are bought with the intention of using them for a long period and are not easily converted to cash. These assets are called Non-Current or Fixed Assets. Examples of these include Land, Buildings, Machinery, Motor Vehicle, and Equipment.
Others assets are bought with the intention to resell at a profit or are acquired with the intention of easily converting them to cash. Examples of these are cash, short term investments, stock and debtors (people who bought goods on credit from the business).
Assets are further categorized into Tangible and Intangible Assets. Tangible assets are the ones you can see and touch such as the examples mentioned before. But there are some assets that cannot be seen or touched, but they do have monetary value and these are referred to as the Intangible ones. Examples of these include Goodwill (company reputation), copyrights, patents, intellectual property, etc.
Any money owed by the business is know as a liability. Business borrow money or make purchase items/services on credit in its usual course of operations. Sometimes these credit arrangements are normally to be repaid within a year. These are called Current/Short Term Liabilities. Examples of these are Creditors, Credit Card Balances, Short-term Loans, Bank Overdrafts, Overdue Expenses etc.
On the other hand, there are times when the business might need more time to repay its debts and may opt for credit facilities that offer longer repayment periods, usually more than one year. These are called Non-Current/ Long Term Liabilities. Examples are Mortgages and Long Term Loans.
Sometimes called Owners Equity or Shareholders Equity is the total capital invested, in the business by the owner(s) either at start-up or subsequent to that. But the buck does not stop there. Any profits earned by the business that is not withdrawn by the owners or paid out to the owners are reinvested and becomes part of Equity. After all, the profits belong to the owners so if it is reinvested it will become Owners Equity.
Equity is also considered the Net Worth of the business since it can be calculated by subtracting the business Total Liabilities from its Total Assets.
Any income made by the business is classified as Revenue. Income can be made from core operational activities such as selling goods/services, but can also be earned other ways. Businesses often buy short term investments on which they earn interest, or they might venture into other areas of earning income such as renting an office space, or earning commissions from third part products. There are also one-off situations in which a business can earn money, like selling a fixed asset at a price that is higher than its current value.