5 Different Types of Accounts in Accounting

The financial statements of most companies are audited annually by an external CPA firm. You’ve probably heard about debits and credits, which basically are accounting terminology for the increase or decrease of balances in an account. However, you should note that credit or debit could mean either an increase or a decrease, depending on which type of account you’re talking about. For example, in asset accounts, debit means an increase, and credit means a decrease, while for liability accounts, it’s the other way around. To illustrate double-entry accounting, imagine a business sending an invoice to one of its clients.

1. If the entries aren’t balanced, the accountant knows there must be a mistake somewhere in the general ledger.
2. Accounting involves recording, classifying, organizing, and documenting financial transactions and data for internal tracking and reporting purposes.
3. This would include Owner’s Equity or Shareholder’s Equity, depending on your business’s structure.
4. Luca Pacioli is considered “The Father of Accounting and Bookkeeping” due to his contributions to the development of accounting as a profession.
5. This is the act of tracking and reporting income and expenses related to your company’s taxes.

When the client pays the invoice, the accountant credits accounts receivables and debits cash. Double-entry accounting is also called balancing the books, as all of the accounting entries are balanced against each other. If the entries aren’t balanced, the accountant knows there must be a straight line depreciation mistake somewhere in the general ledger. FreshBooks will help you stay organized with a user-friendly interface that keeps things simple.

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For some, such as publicly traded companies, audits are a legal requirement. However, lenders also typically require the results of an external audit annually as part of their debt covenants. Therefore, most companies will have annual audits for one reason or another. As a result, all professional accounting designations are the culmination of years of study and rigorous examinations combined with a minimum number of years of practical accounting experience. In the United States, privately held companies are not required to follow GAAP, but many elect to do so voluntarily. However, publicly traded inventory accounting companies whose securities fall under SEC regulations must use GAAP standards.

In its most basic sense, accounting describes the process of tracking an individual or company’s monetary transactions. Accountants record and analyze these transactions to generate an overall picture of their employer’s financial health. Small business owners and individual taxpayers can also benefit from a strong working knowledge of basic accounting concepts and terms.

Liability Accounts

Kristen Slavin is a CPA with 16 years of experience, specializing in accounting, bookkeeping, and tax services for small businesses. A member of the CPA Association of BC, she also holds a Master’s Degree in Business Administration from Simon Fraser University. In her spare time, Kristen enjoys camping, hiking, and road tripping with her husband and two children. The firm offers bookkeeping and accounting services for business and personal needs, as well as ERP consulting and audit assistance.

When combined with accounting software like FreshBooks, managing your business is easier than ever. And you can trust that it’s more accurate than trying to juggle your transactions across a limited landscape. For example, there could be one account called Travel Expenses, but with sub-accounts like Travel Meals and Flight to track the travel expenses in more detailed categories.

Beyond basic accounting terms, this resource also explains alternative word uses and defines related or adjacent concepts. Importantly, it also covers relevant etymologies and word histories in cases where knowledge of these elements can help you better understand the term. Many people also use credit accounts to borrow money for major and minor purchases.

Can a chart of accounts be customized to fit specific business needs?

An accountant using the double-entry method records a debit to accounts receivables, which flows through to the balance sheet, and a credit to sales revenue, which flows through to the income statement. Accounting is the process of recording financial transactions pertaining to a business. The accounting process includes summarizing, analyzing, and reporting these transactions to oversight agencies, regulators, and tax collection entities. The financial statements used in accounting are a concise summary of financial transactions over an accounting period, summarizing a company’s operations, financial position, and cash flows. The first three are assets, liabilities, and equity, which flow into the balance sheet.

Assets describe an individual or company’s holdings of financial value. Let’s say that you sell $1000 worth of your inventory, money which you then place into your bank account. You would then simply increase (debit side) your bank account by $1000 and decrease (credit side) your Inventory account. By carefully tracking the transaction into its respective accounts, you’ll be able to keep track of all types of intangible and tangible assets—in this case, both your inventory and your revenue. So join us as we share the five different types of accounts that you need to know about as a small business owner.

We should preface this headline by saying businesses can have a seemingly endless number of account types. And while that’s true, all those accounts fall under one of 5 account categories. This makes compiling the other account types easier for systematic review and retrieval. The term account is also used in transactions where suppliers sell goods to customers and grant credit terms such as net 10 days.

Expense accounts, on the other hand, represent the resources used to generate income. The three main kinds of ledger accounts are the general ledger, the sales ledger, and the purchase ledger. The sales ledger reflects your Accounts Receivable, while the purchase ledger shows Accounts Payable. Both of these are reflected and balanced in the general ledger account. The Generally Accepted Accounting Principles (or GAAP) are a set of guidelines for proper accounting practice.

Your company’s Equity accounts will increase when there is an investment or funding into your business and decrease when there is a loss or an owner’s draw occurs. If you’ve been a business owner for any length of time, you’ve probably seen a wide variety of different accounts or sub-accounts, which can vary wildly. What’s more, they are often customized to fit the business owner’s specific needs. Accounting is by far one of the most important and prevalent fields in the world today. Its use in organizing business transactions and meeting regulatory requirements makes it a field that requires extensive knowledge and study.

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. By 1880, the modern profession of accounting was fully formed and recognized by the Institute of Chartered Accountants in England and Wales. Let us know what type of degree you’re looking into, and we’ll find a list of the best programs to get you there. Accounting.com is committed to delivering content that is objective and actionable. To that end, we have built a network of industry professionals across higher education to review our content and ensure we are providing the most helpful information to our readers.

In those situations, a supplier is selling goods on account and the customer has purchased goods on account. The supplier has also increased the balance in its current asset account entitled Accounts Receivable and the customer will increase the balance in its current liability account entitled Accounts Payable. Instead of recording a transaction when it occurs, the cash method stipulates a transaction should be recorded only when cash has been exchanged. Financial accounts have two different sets of rules they can choose to follow.

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Besides, this frees up time so you can focus on running your business smoothly. Check out our recent piece on the best accounting software for small businesses. Because the chart of accounts is a list of every account found in the business’s accounting system, it can provide insight into all of the different financial transactions that take place within the company. It helps to categorize all transactions, working as a simple, at-a-glance reference point.