3.4 The Ledger Accounts

1. The Ledger Accounts

An account provides a record of increases and decreases in each item that appears in the financial statements. All the accounts maintained by an entity to enable preparation of the financial statements are collectively called the general ledger.

Each account has three basic parts: (1) a title, which should be descriptive of the nature of the items being recorded in the account; (2) a place for recording increases; and (3) a place for recording decreases.

         Account Title

Debit side	Credit to decrease
(abbreviation-Dr)	(abbreviation-Cr)

2. Types of Accounts

1) Asset Accounts

Asset accounts carry their balances forward from one period to the next. Examples: Cash at bank, Receivable, Prepaid expense (insurance, rent, taxes, office supplies). Equipment, Buildings, and Land.

          Asset          

Debit side	Credit side
Increase	Decrease

2) Liability Accounts (the Equity of Creditors)

Liability accounts also carry their balances forward from one period to the next. Examples: Payables, Unearned revenues (subscriptions, rent, legal fees) and Other liabilities (wages, taxes, interest).

         Liability

Debit side	Credit side
Decrease	Increase

3) Owner’s Equity Account

The balance in the owner's equity account carries forward to the next accounting period. A separate account is employed for each item affecting owner's equity withdrawals, revenues, and expenses. 

(1) Capital account

For proprietorship, a capital account is used to record the original investment and any permanent additional increases or decreases in owner's equity.

          Capital          

Debit side	Credit side
Decrease	Increase

    (2) Withdrawals account

A withdrawals account (also known as a personal account or drawing account) is not a or salary or an expense of the business. Owner's withdrawals of earnings or anticipated earnings include withdrawals of cash (or other assets) to pay personal expenses.

4) Revenue and Expense Accounts

The income statement accounts have balances only during an accounting period. (not carried forward to the next accounting period). The net income or the net loss for a period, as reported on the income statement, is the net increase or the net decrease in capital resulting from operations.

Revenue increases capital, increases in revenues during an accounting period are recorded as credits.

Examples: revenues from repairs, commissions earned, legal fees earned, rent earned, and interest earned.

    Revenue         

Debit side	Credit side
Decrease	Increase

Examples: advertising expense, office supplies expense, salaries expense, rent expense, utilities expense and insurance expense.

Expene decreases capital, so increases in expenses during an accounting period are recorded as credits.

         Expense         

Debit side	Credit side
Increase	Decrease

3. Nominal Accounts VS Real Accounts

Periodically, usually at the end of the accounting year, all revenue and expense account balances are transferred to a summarizing account, and the accounts are then said to be closed. 

The balance in the account, which is the net income or net loss for the period, is then transferred to the capital account , and the summarising account is also closed. 

Because of the periodic closing of these accounts, they are sometimes called temporary accounts or nominal accounts. 

The balances of the accounts reported in the balance sheet are carried forward from year to year and are sometimes referred to as real accounts because of their permanence.