Sample answer:

An ‘account’ is the most basic concept of accounting. Accounts are maintained to record information. It is a specific location where transactions of the same nature are recorded. To explain with the help of an example, recording all expenses incurred for buying equipment like a lawn mower, mushroom knife, weed cutter, spades etc. by a person involved in gardening business would be recorded in the account ‘Equipment’.

The basic types of accounts can be represented as:

Assets: These are properties of value that are owned by the business. These assets can be tangible or intangible. Building, real estate, machinery, merchandise, goodwill are assets of a business. They are generally divided into three sub categories - Current, Fixed and Intangible.

Liabilities: A liability is a legal obligation that a business owes. The liability could accrue in terms of money, goods or services. Generally discharged in cash. The most common examples of liabilities are – wages payable, salaries payable, taxes to be paid and outstanding debts.

Equity: Equity is the interest of the owner in the assets of the business. After all liabilities have been discharged what is left is the owner’s interest/owner’s equity. This is also termed as ‘Net Assets’.

Revenues/Income: Under this head, money that the company earns is recorded. The company may receive money from selling its goods, providing services or dividends from securities are recorded.

Expenses: Expenses are the costs that a company incurs for staying in business. Examples of expenses are – salaries, rent, interest on borrowed money etc.

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