The Five Types of Accounts
By: Rachel Himmelspach
When setting up your books, you must first manage your accounts. The word “account” in bookkeeping doesn’t refer to bank accounts, which one might first think. It actually refers to the different kinds of transactions made, which will all be grouped into their rightful place, a.k.a. “account.” Keep this in mind moving forward. Some examples of accounts are sales, payroll, and inventory, just to name a few.
There are five main types of accounts:
- Assets: cash or resources owned by the business. This includes accounts receivable and inventory.
- Liabilities: Debts owed by the business. This includes accounts payable and loans.
- Revenue/income: Money the business earned by the business. This includes the sales of products and services, and interest income.
- Expenses/expenditures: Cash that flows out of the business to pay for an item or service. This includes salaries and utilities.
- Equity: Liabilities - Assets = Equity. This represents the owner’s held interest in the company, like stock and retained earnings.
It’s necessary to set up these accounts right away to make recording transactions in the future a smooth process, and everything will be organized based on type of transaction. By placing each transaction in it’s correct account, this will ensure your books have the most accurate records possible. Each account contains its own message, and the only way to have a clear and concise understanding of what your business is spending its money on, is by having these five accounts set-up.
If this confuses you, don’t hesitate to contact us for help!