Accounts

In book-keeping, an account is a container for recording transactions. The totals of the debits and credits in each account give a 'balance' which is the difference between the two.

Accounts in the General (aka Nominal) ledger belong to one of two groups (there is no in-between):

Balance Sheet accounts

Profit & Loss accounts

When these two groups are put together with the double-entry system of debits and credits, four distinct account types are created: assets, liabilities, costs and income. These account types are the core of how all financial reporting works.

In the graphic below, balance sheet accounts are shown on a green background and Profit and Loss accounts on a yellow background.

A basic 'Chart of Accounts' - a listing of all the individual accounts - would look like the first column in the grid below. Each individual account has an account type, which can ultimately be assigned to either the balance sheet or profit & loss account.

*Bank accounts can be either an asset (debit) or liability (credit) depending on whether the bank balance is positive or negative.

As transactions are recorded, each account will accumulate the transactions assigned to it.

An example of a bank account with three transactions is shown below:

The above example only shows one 'side' of each transaction. Under the rules of double-entry, for each of these values there will be one of an opposite equal value affecting a different account. For example there would also be a corresponding credit for £100 as a double-entry to first transaction.

The balance on each account is the total of all the debit transactions, minus the total of all the credit transactions.

In the example above the balance of the account is £65.00 debit - the difference between £100 and £65. If the credit total were more than the debit total, it would be a credit balance.

Debits and credits are traditionally shown in separate columns as positive numbers. However, the principles work just the same if debits are shown as positive numbers and credits as negative numbers. Some software lists numbers in this way rather than using the debit and credit labels.

The listing below, showing the balance on each account at any given time is known as the Trial Balance. This report forms the basis of the balance sheet and the profit and loss account.

Notice in the above example that the second bank account is overdrawn - that is that it has a credit (negative) balance. It's a common mistake to confuse a credit bank balance as being positive because banks refer to a customer's positive bank balance as being 'in credit'. This is true for the bank, since the customer is owed the money back and is therefore the bank's creditor. But for the customer, the bank is a debtor. In book-keeping therefore, a positive bank balance is always a debit.

From the Trial Balance a simple Balance Sheet can be drafted. Using the data in the Trial Balance example above, all the accounts with a green background are included in the Balance Sheet below, with assets shown in blue and liabilities shown in red:

Notice that in the liabilities the overdrawn bank account and the credit card account have been added together.

The total assets minus the total liabilities gives the 'net' assets value of £256.00. This is the same as the total Capital & Reserves. The Profit for the year value comes from the Profit & Loss account.

From the same Trial Balance, all the accounts with a yellow background are included in the Profit & Loss Account below:

Note that the two sales lines have been added together, as has the postage and stationery.

The total profit of £256.00 is the same as shown on the Balance Sheet.

Next steps: Double-Entry