(Answered) ACC205 Week 1 – Discussion 2

ACC205 Week 1 – Discussion 2

In accounting, an account refers to a record used to track and summarize the financial transactions of a specific type. Accounts are organized into a chart of accounts and are used to categorize and store financial information related to assets, liabilities, equity, revenue, and expenses.

Accounts are classified into five main categories:

1. Assets: Resources owned by a business that have economic value. Examples include cash, inventory, property, equipment, and accounts receivable.
2. Liabilities: Debts or obligations owed by a business to external parties. Examples include loans, accounts payable, and accrued expenses.
3. Equity: Represents the owner’s interest in the business and includes investments by owners and retained earnings.
4. Revenue: Income generated from the primary activities of a business. Examples include sales revenue, service revenue, and interest income.
5. Expenses: Costs incurred in the process of generating revenue. Examples include salaries, utilities, rent, and cost of goods sold.

In double-entry accounting, every transaction affects at least two accounts. Debits and credits are the foundational principles used to record these transactions.

• Debits: Entries that increase assets and expenses or decrease liabilities and equity.
• Credits: Entries that increase liabilities and equity or decrease assets and expenses.

For example, when a company sells a product for cash:

• Cash account (Asset) increases (debit), reflecting the receipt of cash.
• Sales account (Revenue) increases (credit), recording the earned revenue.

In this transaction, the cash account is debited (increased) because cash is received (an asset increases), while the sales account is credited (increased) because revenue is earned (a revenue account increases).

The fundamental principle of double-entry accounting ensures that for every debit, there is an equivalent credit, maintaining the balance in the accounting equation (Assets = Liabilities + Equity). This system ensures accuracy in recording financial transactions and maintaining the integrity of financial statements.