Have you heard the phrase “just put it on my account?”
People use this when they might not have the money to pay someone on the spot.
But what exactly is an account and how does it work?
If you want to watch a video that explains the definition of an account, check this video out (otherwise read on):
Here’s the definition or meaning of an account from an accounting perspective.
I’m going to explain it by example.
Let’s say you go and buy a coffee and you ask the café worker to put it on your account. What this means is that, they’ll put it down on a note that you owe them $5.
We need somewhere to record this, so let’s put this in a box – a green box that means $5 is owing…
This is the account for IOUs from customers
How about if you come back the next day and you give this café worker $5.
Well… your IOU is now complete. The IOU account should be zero.
But, the thing is, if the account has just one compartment, and we put in the IOU and then take it out when it’s done, it’s like it never existed. Instead, to record things properly, we should have one section that keeps the record in there, and then one section to that takes away the amount.
This is to record when things go up, and then when things go down with the total of the account being what the two add up to be. So plus 5, minus 5, equals 0.
So when you have an IOU from a customer, the IOU from the customer went up in one part of the account, but when this was paid, the IOU of an amount was taken away and reduced.
So we have the record that there was an IOU but we have an account has two parts, one part where things go up, and the other part when things go down. Adding and taking away leads us to a total value in the account. So if you add the IOU of $5 and you take away the payment of $5, you get nothing left in the IOU.
An account having two parts also works well because it handles other things that might happen in a business.
Say you have an IOU for $5 but then the next day, instead of paying $5 to clear out the IOU, you instead give whatever is in your pocket, which is $3.
If an account only had one compartment to record the ups and downs, it gets really messy. With the account split in two compartments, you can easily file the $5 IOU and the coming reduction of $3, thereby meaning this IOU account has $2 remaining to be paid.
So that’s an account, it just simply holds information, usually financial information, for a specific thing, like IOU, cash, sales … and it’s split between the increases in the account and the decreases.
The total of an account is the amount in the two compartments added up together. This is also known as a balance. Having these accounts helps people track things.
Next: What is Accounting? (Easy Definition Explained by a CPA)