5 Different Types of Accounts in Accounting

But sub-accounts help you break down accounts even further into easily managed categories. So rather than listing every transaction using only a few primary accounts of each type, you would use sub-accounts for more detailed recording and reporting. Sub-Accounts are more commonly seen in Income and Expense account types. Accounting software allows you to do basic tasks such as tracking inventory, invoicing and payments, and generating reports on sales and expenses. It’s useful for small businesses and freelancers who don’t have the resources to hire an accountant or jobkeeper bookkeeper.

The remaining two are income or revenue and expenses, which flow into the income statement. Some businesses also include capital and financial statement categories. There are five main account type categories that all transactions can fall into on a standard COA.

1. A business transaction will fall into one of these categories, providing an easily understood breakdown of all financial transactions conducted during a specific accounting period.
2. Businesses must account for overhead carefully, as it has a significant impact on price-point decisions regarding a company’s products and services.
3. It provides a clear picture of the financial health of your organization and its performance, which can serve as a catalyst for resource management and strategic growth.
4. These accounts are separated into different categories, including revenue, liabilities, assets, and expenditures.
5. At larger companies, there might be sizable finance departments guided by a unified accounting manual with dozens of employees.

Assets

And in doing so, you will know which ones to use in your business for effective bookkeeping. Accounting software normally lists the accounts in a COA (Chart of Accounts). A COA is where you organize the various accounts used in your business. Only when accounts are set up in the COA can they be selected and used to track specific transactions or financial events in accounting systems.

How to Use This Guide to Accounting Terms

These are asset accounts, liability accounts, equity accounts, revenue accounts, and expense accounts. If necessary, you may include additional categories that are relevant to your business. To create a COA for your own business, you will want to begin with the assets, labeling them with their own unique number, starting with a 1 and putting all entries in list form. The balance sheet accounts (asset, liability, and equity) come first, followed by the income statement accounts (revenue and expense accounts).

Using Accounting Software

Publicly traded companies are collectively owned by the shareholders who hold their stock. Types include current and noncurrent, operating and nonoperating, physical, and intangible. Classes include broad categories such as cash and cash equivalents, equities, commodities, real estate, and intellectual property, among others.

You can easily report on the most applicable sub-account to get a sense of the financials in that category. This is a much faster method than scrolling through numerous transactions in the Travel Expenses account, trying to distinguish which are meals and which are flights. Below is a handy chart explaining the effects that debits and credits have on each of the five primary account types.

A chart of accounts gives you a clear picture of how much money you owe in terms of short- and long-term debts. Your COA can help you determine how much of your monthly income you can afford to put toward your debts and help you develop longer-term debt repayment plans. Liabilities are all the debts that your company owes to someone else. This would include your accounts payable, any taxes you owe the government, or loans you have to repay.

Understanding Accounting

You may also wish to break down your business’ COA according to product line, company division, or business function, depending on your unique needs. This ongoing log of records allows the details of your business’s financial records to be tracked. These details are then used to build up your financial statements to show how much you own and owe (balance sheet) and how much you are earning or losing (income statements). With your financial statements and financial data accurate and complete, you will be able to perform analysis and make impactful business decisions.

The history of accounting has been around almost as long as money itself. Accounting history dates back to ancient civilizations in Mesopotamia, Egypt, and Babylon. For example, during the Roman Empire, the government had detailed records of its finances. However, modern accounting as a profession has only been around since the early 19th century. In accounting, you’ll come across certain titles which appear to bear similar duties but actually have unique job descriptions.

In this section, we’ll briefly review the roles of accountants vs. CPAs and tax professionals. Accounting is like a powerful machine where you input raw data (figures) and get processed information (financial statements). The whole point is to give you an idea of what’s working and what’s not working so that you can fix it. The term “owner’s equity” covers the stake belonging to the owner(s) of a privately held company.

You can customize your COA so that the structure reflects the specific needs of your business. Accountants help businesses maintain accurate and timely records of their finances. Accountants also provide other services, such as performing periodic audits or preparing ad-hoc management reports. Basic accounting concepts used in the business world direct labor efficiency variance formula encompass revenues, expenses, assets, and liabilities.

In the U.S., licensed CPAs must have earned their designation from the American Institute of Certified Public Accountants (AICPA). If you’re using accounting software and want to set up a customized chart of accounts, you can add or edit parent and sub-accounts to the existing default chart of accounts. Doing this will help you stay organized and better understand how your business is doing financially. The role of equity differs in the COA based on whether your business is set up as a sole proprietorship, LLC, or corporation. This would include Owner’s Equity or Shareholder’s Equity, depending on your business’s structure.

Expense accounts are increased when money is spent to run your day-to-day business activities. Some people get confused when they see Accounts Receivable since they don’t physically have that money on hand. But because that money is still owed to you, it counts toward your assets. Remember, under the Assets category, credits decrease while debits increase. While financial accountants often use one set of rules to report the financial position of a company, tax accountants often use a different set of rules.

Another account, Sales, will collect all of the amounts from the sale of merchandise. Most accounting systems require that every transaction will affect two or more accounts. For example, a cash sale will increase the Cash account and will increase the Sales account.