Keeping accurate books starts with knowing the types of accounts in accounting. Otherwise, you won’t know how to record transactions.
Familiarizing yourself with accounting categories for small business also teaches you how to increase and decrease amounts with debits and credits.
Start keeping accurate books by learning about the types of accounts in accounting below.
The 5 core types of accounts in accounting
The types of accounts in accounting help you sort and track transactions.
When you make purchases or sales, record the transaction in the proper account. That way, you can see whether an account is increasing or decreasing. By analyzing your accounts, you can determine your business’s balance.
Generally, businesses list their accounts by creating a chart of accounts (COA). A chart of accounts lets you organize your account types, number each account, and easily locate transaction information.
Although businesses have many accounts in their books, every account falls under one of the following five categories:
- Income or revenue
Once you familiarize yourself with and learn how debits and credits affect these accounts, you can accurately categorize your other accounts.
So, how do debits and credits affect asset, expense, liability, equity, and income accounts? Do debits decrease or increase these accounts in your books? How about credits?
Here’s a quick-reference chart you can use to get started:
As you can see, liabilities, equity, and revenue increase when you credit the accounts. Assets and expenses increase when you debit the accounts and decrease when you credit them.
Sub-accounts you may use
Rather than listing each transaction under the above five accounts, businesses can break accounts down even further.
By using sub-accounts, you know exactly where funds are coming in and out of. And, you can better track how much money you have in each account.
Let’s say you put money into your petty cash fund. A petty cash fund is a type of asset. But instead of debiting a general asset account, you would debit your petty cash fund. That way, you know you did not increase other asset accounts, like a business checking account.
Here are some sub-accounts you can use within asset, expense, liability, equity, and income accounts.
Assets are the physical or non-physical property that adds value to your business. For example, your computer, business car, and trademarks are considered assets.
There are a number of sub-accounts that fall under the asset account, including:
- Petty cash
- Accounts receivable
Although your accounts receivable account is money you don’t yet have, it is considered an asset account because it is money owed to you.
Again, assets are increased by debits and decreased by credits. This means you debit the corresponding sub-asset account when you add money to it. And, credit a sub-asset account when you remove money from it.
Let’s look at an example. You sell some inventory and receive $500. You put the $500 in your checking account. Increase (debit) your checking account and decrease (credit) your inventory account.
Expenses are costs your business incurs during operations. For example, buying office supplies is considered an expense.
Examples of sub-accounts that fall under the expense account category include:
- Cost of goods sold (COGS)
Remember that expenses are increased by debits and decreased by credits. When you spend money, you increase your expense accounts.
Liabilities are amounts your business owes. These are expenses you may have incurred but have not yet paid.
Types of business accounts that fall under the liability branch include the following:
Accounts payable are considered liabilities and not expenses. Why? Because accounts payables are expenses you have incurred but not yet paid for. As a result, you add a liability, or debt.
Credit liability accounts to increase them. Decrease liability accounts by debiting them.
Equity is the difference between your assets and liabilities. It shows you how much your business is worth.
Here are a few examples of equity sub-accounts:
Again, equity accounts increase through credits and decrease through debits. When your assets increase, your equity increases. When your liabilities increase, your equity decreases.
Income, or revenue, is money your business earns. Your income accounts track incoming money, both from operations and non-operations.
Examples of income sub-accounts include:
- Product sales
- Earned interest
- Miscellaneous income
To increase revenue accounts, credit the corresponding sub-account. Decrease revenue accounts with a debit.
Quick-reference list of accounts in accounting
Keeping track of your different types of accounts in accounting can be a challenge. Remember, you can create a chart of accounts to stay organized.
Methods of accounting: Different types of accounts
Will you use all of the above types of accounts in accounting?
The types of accounts you use depend on the accounting method you select for your business. You can choose between cash-basis, modified cash-basis, and accrual accounting.
If you use cash-basis accounting, you do not use liability accounts like accounts payable.
Modified cash-basis accounting uses the same accounts as accrual accounting, which are the five core accounts.
Whether you use cash-basis, modified cash-basis, or accrual accounting, Patriot Software has you covered. Organize your different types of accounts with our easy-to-use accounting software. Get started with an obligation-free demo today!
This is not intended as legal advice; for more information, please click here.