BRIEF OF TYPES OF ACCOUNTS

In continuation of my knowledge sharing from LBS experience, I will like to present brief expository on TYPES OF ACCOUNTS as an aid to SMEs.

Introduction

When you buy or sell goods and/or services, you must update your business accounting books by recording the transaction in the proper account. This shows you all the money coming into and going out of your business. And, you can see how much money you have in each account. Sort and track transactions using accounts to create financial statements and make business decisions. 

Generally, businesses list their accounts by creating a chart of accounts (COA). A chart of accounts lets you organize your account types, number each account, and easily locate transaction information.

So, what are the accounts you need to keep track of? There are five main types.

Although businesses have many accounts in their books, every account falls under one of the following five categories:

• Assets
• Expenses
• Liabilities
• Equity
• Revenue (or income)

Familiarize yourself with and learn how debits and credits affect these accounts. Then, you can accurately categorize all the sub-accounts that fall under them.

So, how do debits and credits affect asset, expense, liability, equity, and revenue accounts? Do debits decrease or increase these accounts in your books? How about credits?

Assets and expenses increase when you debit the accounts and decrease when you credit them. Liabilities, equity, and revenue increase when you credit the accounts and decrease when you debit them.

Asset accounts

Assets are the physical or non-physical types of property that add value to your business. For example, your computer, business car, and trademarks are considered assets.

Some examples of asset accounts include:

• Bank
• Cash
• Inventory
• Accounts Receivable

Although your Accounts Receivable account is money you don’t physically have, it is considered an asset account because it is money owed to you.

Again, debits increase assets and credits decrease them. Debit the corresponding sub-asset account when you add money to it. And, credit a sub-asset account when you remove money from it.

Expense accounts

Expenses are costs that your business incurs during operations. For example, office supplies are considered expenses.

Examples of accounts that fall under the expense account category include:

• Payroll
• Insurance
• Rent
• Maintenances

Remember that debits increase your expenses, and credits decrease expense accounts. When you spend money, you increase your expense accounts.

You can set up sub-accounts for insurance (e.g., general liability insurance, errors and omissions insurance, etc.) to further break things down. 

Liability accounts

Liabilities represent what your business owes. These are expenses you have incurred but have not yet paid.

Types of business accounts that fall under the liability branch include:

• Payroll Tax Liabilities
• Sales Tax Collected
• Credit Note Liability
• Accounts Payable

Accounts payable (AP) are considered liabilities and not expenses. Why? Because accounts payables are expenses you have incurred but not yet paid for. As a result, you add a liability, or debt.

Credit liability accounts to increase them. Decrease liability accounts by debiting them.

Equity accounts

Equity is the difference between your assets and liabilities. It shows you how much your business is worth.

Here are a few examples of equity accounts:

• Owner’s Equity
• Common Stock
• Retained Earnings

Again, equity accounts increase through credits and decrease through debits. When your assets increase, your equity increases. When your liabilities increase, your equity decreases.

Revenue accounts

Last but not the least, we have arrived at the revenue accounts. Revenue, or income, is money your business earns. Your income accounts track incoming money, both from operations and non-operations.

Examples of income accounts include:

• Product Sales
• Earned Interest
• Miscellaneous Income

To increase revenue accounts, credit the corresponding sub-account. Decrease revenue accounts with a debit.

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