The word “account” has a different meaning in the world of accounting than most people are used to.  Some of us are used to the idea of a “bank account”, which is seen as a sort of “mini-vault” in which we keep our money.  Others think of “account” as a another word for “client”.  Both of these uses of account are based on the term “account” from accounting, but in accounting an “account” can be other things as well.

In accounting, an account is simply a label used for recording a dollar balance and a history of changes to that balance.  The dollar balance may be associated with an actual bank account, or it may represent the money owed you by a client.  It might also represent your reported income, expenses, or the value of assets that you own.

Account Types

In order to make it clear what each account is being used for, it is given a “type”.  The type determines where the account appears in the different reports, and also how it can be used when entering income, expenses, transfers, and payments.

Account Numbers

The account number is a short-hand for naming the account; if you’re doing all your data entry using the number pad on the keyboard, it’s pretty easy to punch in a four digit number, much easier than it is to move your hands over to the main part of the keyboard.  Some accountants and bookkeepers are entering a lot of data in a day, and they want to be as fast as possible.

For historical reasons the numbers are organized so that they start with digits that show what part of the balance sheet an account is on, and the less significant numbers determine the order of accounts within that section.

Chart of Accounts

The design of a “chart of accounts” and the numbering of the accounts is a task which has traditionally been a very important part of setting up an accounting system.  The list of accounts and their numbers is called the “Chart of Accounts”.  In our accounting software, you can rename, renumber, add or remove accounts at any time, so you designing a chart of accounts ahead of time may not be necessary, although it could be useful.

Summary

In accounting, an “account” is not just a bank account or a client account.  It could represent the dollar value of other, more abstract things.  Depending on what it represents, it’s given a type.  For efficient data entry, it’s given a number to use as a shorthand.  The list of accounts, their numbers and types, is called the “Chart of Accounts”.

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Tags: account numbers, account types, accounting, balance sheet, chart of accounts

This entry was posted on Monday, August 18th, 2008 at 9:07 am by Dobes and is filed under Accounts, Accounts Set Up. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.