5 Types of Accounts in Accounting

. 8 min read
5 Types of Accounts in Accounting

Table of Contents:

1. What Is Accounting?

2. Advantages Of Accounting

3. What Is Accounting Cycle?

4. What Are Types Of Accounts In Accounting?

5. Types Of Accounts In Accounting

6. How Does Types Of Accounts In Accounting Helps Businesses?

1. What Is Accounting?

Accounting is the method of tracking a company’s financial transactions. Accounting is the method of gathering, analysing, and sharing economic data to make decisions.

2. Advantages Of Accounting

There are many benefits of accounting for any business, small or big. Accounting is essential in business. It allows you to report revenue and expenses, ensure statutory compliance, and provide customers, managers, and the government with quantitative financial data that you can use to make business decisions.

3. What Is Accounting Cycle?

The accounting cycle is the method of defining, reviewing, and tracking a company’s accounting activities. Accounting’s three phases are used in this process: aggregation, sorting and reporting.

4. What Are Types Of Accounts In Accounting?

An account is nothing more than a summary of the transactions made by a company with other people, their members, and clients. For example, when a company transacts with its suppliers or consumers, the suppliers and customers are treated as distinct accounts. As a result, if a company conducts a trade, it must first define the accounts involved before applying the necessary accounting principles and golden accounting laws to log those transactions.

Keeping track of your various forms of accounts in accounting can be difficult. Business owners either do their paperwork or pay someone else to do it. The owners must have a basic idea of what is going on. Accounts in accounting are divided into five categories: assets, liabilities, equity, income, and expenditures. Our job is to decide how the money in your business is invested or earned and how much money is to be put in each account. Each category has many subparts in themselves, which are discussed later.

5. Types Of Accounts In Accounting

In this section, we have discussed the five different types of accounts in accounting along with examples of accounting.

1- Assets

Assets are the different forms of property (visible and invisible) that add value to a business. Anything that the business holds is included in the investment budget. Because of their higher prices and longer lifespan, investments are depreciated, or ‘sold down’, over the years using depreciation methods. There are two types of assets:

  • Visible or tangible assets: Tangible assets, also known as hard assets, are physical assets. Desktop computers, laptop computers, automobiles, currency, vehicles, property, and other tangible assets are examples.
  • Intangible assets: Intangible assets are those that are not physically present. Intangible properties include the name, branding, copyrights, and other non-physical objects.

Assets can also be classified based on their life expectancy or liquidity (the speed at which they can be exchanged into cash) as the following types:

  • Current assets, also known as short-term assets, are the ones that are consumed, exchanged, or turned into cash within one fiscal year. They are reported at their current or market price in the balance sheet.
  • Fixed assets are tangible assets with a life expectancy of at least one year and usually much longer.

Credits boost assets, and debits reduce them.

Assets = Liabilities + Owner’s Equity

man hand holding card with the word expenses
Types Of Accounts In Accounting

2- Expenses

Expenses are the losses that your company incurs when operating. Any commodity or service purchased by the corporation to produce revenue or import products is called an expense. It could include campaign expenses, utilities, leasing, and wages, among other things. Any deductions are tax-free, lowering the taxable profits. The different types of expenses are:

  • Cost of goods sold: The cost of purchasing raw materials and turning them into finished products is the Cost of Goods Sold (COGS). It excludes sale and operating expenses paid by the whole group and interest expense and losses on unusual products.
  • Financial expenses: A loss is the cost of operations incurred by a company to raise revenue. Supplier fees, staff benefits, plant rentals, and equipment depreciation are all examples of common expenses.
  • Extraordinary expenses: Extraordinary daily expenditures are charges paid on major one-time activities or sales that are not part of the firm’s normal business operations. Employee reduction, the sale of property, or the disposition of a valuable asset are examples of such expenses.
  • Non-operating expenses: These are expenses that you cannot deduct from operating proceeds. The most popular non-operating cost is Interests. The cost of borrowing money is expressed as Interest. Bank loans typically require interest payments, but these payments provide little operating profits. As a result, they are categorised as non-operating expenditures.

Debits increase the costs, while credits reduce them. When you pay money, it goes into your expense account.

3- Revenue Or Income

Revenue, also known as profits, is the amount of money earned by your business. Your income accounts track money that comes in from activities and non-operations. Income accounts are transient or nominal accounts since their value is reset to zero at the start of each new accounting year, which is typically a fiscal year. This is a job that is usually handled automatically by accounting software.

Revenue includes the income which the business receives from the sale of goods and services. This term is often used to refer to dividends and interest payments earned on marketable securities. Different types of revenue accounts are:

  • Operating revenue: Operating income is revenue generated from the company’s main operations, such as sales.
  • Non-operating revenue: Non-operating revenue is money gained by a side project that is incidental to the business’s day-to-day operations, such as dividend income or investment gains. Non-operating revenue fluctuates more than operating revenue.

To maximise sales balances, credit the corresponding sub-account. Reduce sales accounts using a debit.

4- Liabilities

Liabilities are what the company owes. The loans or commitments owed to banks and money owed to other outsiders by your business are referred to as liabilities. Loans, outstanding utility bills, bank overdrafts, car loans, mortgages, and other debts are examples. Liabilities can be classified as the following:

  • Current liabilities: Current liabilities are commitments or loans owed by a business due within a year or within the usual operating period. They are short-term liabilities.
  • Non-current liabilities: Non-current liabilities are long-term debts or financial obligations reported on a company’s balance sheet. They are often referred to as long-term liabilities. Long-term obligations are a critical component of a company’s long-term funding.
  • Contingent liabilities: Contingent obligations are liabilities that could arise as a result of a potential case. As a result, contingent obligations are liabilities that can arise in the future.

Credit liability balances will rise. To lower liability accounts, debit them.

equity text written on wooden block with stacked coins on grey background
Types Of Accounts In Accounting

5- Equity

Equity indicates how much the company is worth.

                                    Equity = Assets - Liabilities

Equity is the possession of a valuable commodity. After deducting obligations, this is the residual interest in the company's assets. Equity includes common shares, dividends, and deferred earnings. ‘Net Worth’ is another term for equity. Equity can be classified as the following:

  • Stockholders’ equity: Stockholders’ equity is also known as shareholders’ equity. It is the number of assets left with the business after the settling of all the liabilities.
  • Owner’s equity: The amount of ownership you have in your company is referred to as the owner’s equity. Deducting your obligations from your savings yields the owner’s equity.

Equity accounts grow through credits and shrink through debits. As your investments grow, so does your equity. When your obligations double, your equity shrinks.

6. How Does Types Of Accounts In Accounting Helps Businesses?

Accounting helps all kinds of businesses in decision-making, organising, and monitoring. Accounting accessibility for every corporate activity sparks the corporation to function with performance, productivity, and consistency on all duties completed. It leads to increased output because management can make better decisions and schedule more effectively due to the smooth flow of transactions in a market. With this article, you have basic knowledge about the different types of accounts and their types and examples. The only thing left to do is start accounting for your business.

Also read:

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3) What are Mutual Funds? Here's what you should know
4) Difference Between Payout Modes: Wallet vs UPI vs NEFT vs RTGS vs IMPS

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Q What are the three accounting golden rules?

Ans. Accounting books are required if you wish to follow the golden rules of accounting. Follow the three fundamental accounting standards to keep your records up to date and correct.

  • Deduct from the recipient and credit from the giver.
  • What comes in is debited, and what goes out is credited.
  • Expenses and deficits are debited, while profits and gains are credited.

Q. What are the five fundamental accounting principles?

Ans. To guarantee the most accurate financial condition, each organisation must adhere to basic accounting rules. Because your clients and stakeholders place their faith in your firm, it is critical to record trustworthy and validated information. Thus, you must follow the five fundamental types of accounting principles.

  • The Revenue Principle
  • The Expense Principle.
  • The Principle of Matching.
  • The Cost Principle.
  • The Objectivity Principle

Q. What are fundamental financial statements?

Financial reports are statements that explain the entity's financial information such as assets, liabilities, equity, earnings and costs, shareholders' contributions, cash flow, and other associated information over time. They reveal everything about your company. Different kinds of financial statements are:

  • The balance sheet
  • Income statement
  • Cash flow statement
  • Statement of adjustments in shareholders’ or stockholders’ equity