In accounting, there are different types of accounts that track various aspects of the business. These accounts help companies keep track of their financial position, performance, and cash flow. This blog post will discuss the most common types of financial accounts and what they represent for a business.
But before moving forward, let us try and brush up on the fundamental questions, i.e., what is accounting, what does an accountant do, and the role of accounts in a business.
What is Accounting?
Accounting is the process of recording, classifying, and summarizing financial transactions to provide helpful information in making business decisions. An accountant performs accounting tasks such as preparing financial statements, managing budgets, and assessing financial risk. They also have the responsibility to ensure compliance with laws and regulations governing their business activities.
What Does an Accountant do?
An accountant prepares financial statements, which show a business’s financial position at a specific point in time. They also manage budgets, which estimate future income and expenses. Finally, accountants assess financial risk, which is the likelihood that a company will not repay its debts (liabilities) with its assets.
What is the Role of Accounts in a Business?
The role of accounts in a business is to track financial transactions and provide helpful information in making business decisions. Financial transactions can include selling goods or services, issuing loans, or paying taxes.
The information provided by accounting can help businesses make informed decisions. Like how much inventory to buy, whether or not they should expand their operations into another country, and what kind of investments would be most profitable for them.
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Types of Accounts in Accounting
Now that the basics are covered. Let us get back to our topic, i.e., different types of accounting. The different accounting types are asset accounts, liability accounts, equity accounts, revenue accounts, and expense accounts.
#1. Asset Accounts
An asset account is a record of a business’s assets. Assets are anything that provides value to the company and can be used to pay its debts. The most common types of assets include cash, investments, inventory, and property.
#2. Liability Accounts
A liability account is a record of a business’s liabilities. Liabilities are anything that the company owes to others. The most common types of liabilities include loans, accounts payable, and taxes payable.
#3. Equity Accounts
An equity account is a record of a business’s owner’s investment in the company. Equity represents the portion of the business that is not owed to outsiders. The most common type of equity account is the owner’s capital account, which records the amount of money that the owner has invested in the company.
#4. Revenue Accounts
A revenue account is a record of a business’s income. Revenue represents cash or other assets that the company receives due to its normal operations. The most common type of revenue account is the sales account, which records income from the sale of goods or services.
#5. Expense Accounts
An expense account is a record of a business’s expenses. Expenses are cash or other assets that the company pays out due to its normal operations. The most common expense accounts include salaries and wages, rent, utilities, depreciation on equipment, and advertising costs.
Now that we have covered the types of accounts let us look at each in detail.
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Types of Asset Accounts
A cash account is a record of all the money that a business has on hand. This money in hand includes currency, coinage, and bank deposits.
The most common type of asset account is the current assets account.
Current assets include the below-mentioned items:
- Accounts receivable, i.e., money due from customers,
- Inventory, i.e., products ready to sell or in production,
- Prepaid expenses, i.e., items such as insurance or rent that have been paid in advance and other current assets.
An investment account is a record of all the money that a business has invested in stocks, bonds, and other securities. The most common investment account is the long-term investments account, which records land, buildings, and equipment items.
A property account is a record of all the business’s real estate holdings. The most common type of property account is the land account, which records the value of the company’s land.
An inventory account is a record of all the products that a company has available for sale. The most common inventory account is the merchandise inventory, which records the value of goods ready to be sold.
A prepaid expense account is a record of all the money a business has paid in advance for services or products. The most common prepaid expense account is the insurance account, which records the amount of money the company has paid for insurance coverage.
Other Current Assets
Other current assets account is a record of any different types of assets that a company has on hand. For example, this account could include accounts receivable (money due from customers), notes receivable (promises by others to pay a certain amount of money in the future), or investments.
Types of Liability Accounts
An accounts payable account is a record of all the bills a company owes to others. The most common liability account type is the accounts payable account, which records loans, credit cards, and leases.
An accrued liability account is a record of all the money a company owes to others but does not yet have an invoice. The most common accrued liability account is the wages payable account, which records employee salaries and benefits due in the future.
A tax payable account is a record of all the money a company owes to the government in taxes. The most common tax payable account is the income tax payable account, which records federal and state income taxes.
A long-term liability account is a record of all the money a company owes to others for more than one year. The most common type of long-term liability account is the payable bond account, which records notes payable and mortgages.
Other liabilities account is a record of different types of liabilities that a company has. These liabilities could include accounts payable (money owed to others), accrued liabilities (money that a company owes but does not yet have an invoice), or taxes payable.
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Types of Equity Accounts
A shared stock account is a record of all the money invested in a company’s shares of common stock. The most common type of equity account is the preferred stock account, which records dividends and earnings per share data.
A retained earnings account is a record of all the money invested in a company’s shares of common stock. The most common type of retained earnings account is the net income account, which records profits and losses for a given period.
Other Equity Accounts
Other equity accounts are records of different types of equity that a company has. For example, this account could include common stock (money invested in a company’s shares of common stock). Or, Retained earnings (the total amount of money that a company has earned from its operations), or income tax expense.
Types of Revenue Accounts
Accounts that have stable revenue are the ones that report income from the business and are therefore credit accounts. These include Revenue from Sales, Revenue from Rental incomes, Revenue from Interest income, etc.
A sales revenue account is a record of all the money that a company has earned from its sales. The most common type of revenue account is the net sales account, which records items such as total sales and discounts given to customers.
An interest income account is a record of all the money a company has earned from lending out its capital.
Types of Expense Accounts
Cost of Goods Sold
A cost of goods sold account is a record of all the money a company has spent to produce its products. In addition, it records items such as raw materials and labour costs.
A selling expense account is a record of all the money a company has spent to promote and sell its products. In addition, it records items such as TV commercials and print ads.
An administrative expense account is a record of all the money a company has spent to run its day-to-day operations. In addition, administrative expense records items such as employee salaries and benefits.
Other expenses account is a record of any costs not explicitly included in any expense accounts. For example, this account could consist of interest paid on loans, legal fees, or rent.
We saw that accounting is an essential process for businesses. It helps track financial performance and make better strategic decisions. Accounts play a key role in recording and organizing financial transactions. There are different types of accounts that serve purposes in the business. By understanding how these accounts work, business owners can make more informed decisions about their finances. We hope this article was insightful to understand the types of accounts and what they all mean.