Understanding Accounts and Contacts

Account: Account can be any organization that your company does business with. It can be your competitor,partner or customer. There can be a B2B or B2C accounts.By default, the accounts are configured for B2B  clients in Saleforce.Now if you have a client who is an individual, how do you configure your Salesforce for that.Salesforce can be tweaked to configure for individual clients and that is called as Person Accounts.Basically, you create an Account to hold all the information pertaining to that particular company or organization.For e.g You have Account  name, Account Number,Account Type(as in  Customer,Partner),Industry and other fields as per your business rules.
If Bank of America is one of your customer,you would create an account name as Bank of America.You can sort your customers by type so that you can have always separate customers from competitors.Basically, account is the centralized location for all your business related information.

Contacts: Contact is that person in your account with whom you would be dealing on all your business related meetings.Every Contact is associated with an Account name.You cannot have a contact without an Account name.Contact record in Salesforce stores all the information about that individual like First  name,last name,his mailing address. Some default reports that you can generate  based on contacts are Partner account contacts,Bounced contacts and contact history.