What Is an Account in Accounting? Definition, Types, and Examples
/What is an Account?
An account is a record used in accounting to collect increases and decreases for a specific asset, liability, equity item, revenue source, or expense. Accounts are maintained in the general ledger and are used to organize transactions so a business can prepare financial statements, review account balances, and support audit trails. The word account can also refer to a customer relationship or to a credit transaction, such as a sale on account.
Account Record
An account can be the record in a system of accounting in which a business records debits and credits as evidence of accounting transactions. Thus, the accounts receivable account stores information about billings to customers, as well as reductions of those billings due to subsequent payments made by customers. Similarly, the cash receipts from a stock sale will be recorded in the common stock account. These records are stored in the general ledger. A business may have hundreds or even thousands of accounts set up in its accounting system, depending on the complexity of the business.
Customer Account
An account can be considered the same as a customer. Under this meaning, an account is another entity or person for whom a business acts as a supplier, and with whom there may be an outstanding accounts receivable balance. In this context, an account generally refers to an established customer, rather than an entity with which a company does business just once. For example, a new salesperson is assigned 30 accounts when she is hired; this means that she is responsible for selling to the assigned list of 30 customers.
A business typically collects and stores information about the location, characteristics, credit rating, sales history, and payment history of a customer account.
Sale on Account
If a sale is "on account," this means that the buyer will pay the seller at a later date, based on the credit terms associated with the transaction (such as net 10 terms, where the buyer is obligated to pay in 10 days from the invoice date). For example, a seller allows a customer to purchase goods on account, where the customer is obligated to pay the seller no more than 30 days from the purchase date. The general ledger account primarily impacted by a sale on account is the trade accounts receivable account.
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Account FAQs
What is an account balance?
An account balance is the net amount in an account after all debit and credit entries have been posted. It shows the current value of that account, such as cash on hand, amounts owed by customers, liabilities payable, revenue earned, or expenses incurred, depending on the account type being reviewed.
What does “on account” mean?
“On account” means that a transaction is made on credit rather than paid for immediately. For example, a sale on account creates accounts receivable because the customer owes payment later. A purchase on account creates accounts payable because the buyer has received goods or services but has not yet paid.
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