The account – transactions that take place in a business enterprise during a specific period may effect increases and decreases in assets, liabilities, capital, revenue and expense items. To make up to-date information available when needed and to be able to prepare timely periodic financial statements, it is necessary to maintain a separate record for each item. For e.g. It is necessary to have a separate record devoted exclusively to record increases and decreases in cash, another one to record increases and decreases in supplies, a third one on machinery, etc. The type of record that is traditionally used for this purpose is called an account. Thus an account is a statement wherein information relating to an item or a group of similar items are accumulated.
The simplest form of an account has three parts:
- A title which gives the name of the item recorded in the account
- A space for recording increases in the amount of the item, and
- A space for recording decreases in the amount of the item. This form of an account is known as a ‘t’ account because of its similarity to the letter ‘t’