Accounts titles are the building blocks for accounting, and it’s the place where accounting transactions are posted. In a double accounting system, the transactions impact at least one account balance, while it may impact more than one account balance.
Transaction impacting on two and more account titles
Suppose the business purchases goods in cash; the impact of the transaction is that goods are received in the business, and cash is paid. It suggests that only two account titles need to be updated; these accounts include ”purchase of the goods” and ”cash”.
On the other hand, if the business purchases goods half in cash and half in credit, an accountant needs to update three account balances that include ”purchase account”, ”liability account”, and the ”cash account”.
It means an accountant needs to closely observe the nature of the financial event before posting in the accosting system. Suppose there is a gap in the understanding of accountants regarding understanding and formation of the accounting entry. In that case, there may be a problem in updating account titles leading to errors in the overall financial reporting mechanism.
Detailed understanding of account titles in accounting
The general ledger of the business contains various account titles. These account titles can also be referred to as charts of account/balances. The balance from each account title/chart is accumulated to produce a trial balance that is used in the generation of financial statements for the business.
Depending on the nature and complexity of the business, there can be few to various account balances. A business with a complex structure of expenses and multiple sources of income is expected to contain a higher number of account titles and vice versa.
Allocation of the digits
Account titles are given a certain reference number. For instance, the following codes can be assigned to the account balances.
| Type of the account balance | Code |
| Assets | +1 |
| Equity | +2 |
| Liability | +3 |
| Revenue | +4 |
| Expenses | +5 |
These codes help to identify the nature of the account balance. Further, sorting and tracking the account balances can be more easily done to operate the accounting function.
Increase with the business growth
At the start of the business, the number of account titles are limited. However, as soon as the business grows, their revenue and expenses get complex, and the number of account titles increase.
Mapping of the account titles
Account titles are mapped in line with their nature. In a financial transaction, an accountant needs to identify the nature of the account titles and post the entry. For instance, the account titles for the assets, liabilities, and equity are mapped in the balance sheet.
Further, the maturity of the account balances helps determine if specific account titles should be classified as current/non-current except equity, which is perceived to belong to long-term.
Likewise, the revenue and expenses account titles are mapped in the income statement.
Account titles in accounting software
Accounting software by default contains specific account titles, the account titles produced by accounting software are customized and depend on the sector of the business. For instance, manufacturing companies are expected to have cost of sales as account title.
Conclusion
Account titles are the building blocks of the business; the accounting transactions are reflected in the account balances. Every time an accountant posts in the accounting record, at least two account charts need to be updated.
The account titles are given a certain reference number to track and sort. Further, these accounts can be mapped as per the nature of the account balances.
Also read, analyzing financial transactions
