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5 Different Types of Accounts in Accounting

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When you buy or sell goods and services, you must update your business accounting books by recording the transaction in the proper account. This shows you all the money is spent or received from your business, and you can see how much money you have in each account. Here, we have mentioned the 5 types of accounts in accounting-

1. Assets 

Assets can be defined as commodities or entities, whether tangible or intangible, that the company owns with economic value. Assets as recorded to the left side of the balance sheet, assets include Cash, Investments, Inventory, Office equipment, Machinery, Real estate, Company-owned vehicles. These are the types of assets:

Tangible Assets:- Tangible assets also known as hard assets which belong to physical entities. We can also touch, feel and see tangible assets that the business owns such as; land, buildings, vehicles, equipment, cash, furniture, and inventory.

  • Current assets:- Current assets are assets that can be easily converted into cash and cash equivalents (typically within a year). Current assets are also termed liquid assets and examples of such assets are Cash, Cash equivalents, Short-term deposits, Accounts receivables, Inventory, Marketable securities, and Office supplies.

  • Non-Current Assets/ Fixed Assets:- Non-current assets are assets that cannot be easily converted into cash and cash equivalents. Non-current assets are also called fixed assets, long-term assets, or hard assets. Examples of non-current or fixed assets include Land, Building, Machinery, Equipment, Patents, and Trademarks.

Intangible Assets:- Intangible assets are assets that lack physical existence. Examples of intangible assets are; Goodwill, Patents, Brand, Copyrights, Trademarks, Trade secrets, Licenses and permits, and Corporate intellectual property.

2. Liabilities 

A liability is something a person or company owes, usually a sum of money. As recorded to the right side of the balance sheet, liabilities include loans, accounts payable, mortgages, deferred revenues, bonds, and accrued expenses, etc. These are the types of liabilities:

Current Liabilities:- Current liabilities, also known as short-term liabilities, are debts or obligations that need to be paid within a year. Current liabilities should be closely watched by management to ensure that the company maintains sufficient liquidity from current assets to ensure that the debts or obligations can be met. For example; Account Payable, Interest payable, Income taxes payable, Bills payable, Bank account overdrafts, Accrued Expenses, and Short-term loans.

Non- Current Liabilities:- Non-current liabilities, also known as long-term liabilities, and are debts or obligations for more than one year. Long-term liabilities are an important part of a company’s long-term financing. Companies take long-term debt to acquire immediate capital to purchase capital assets or to invest in new capital projects. Examples of non-current liabilities include Bonds payable, long-term notes payable, long-term loans,  deferred tax liabilities, Mortgage payable, and Capital leases.

Contingent Liabilities:- Contingent liabilities are liabilities that can occur based on the outcome of a future event. Therefore, contingent liabilities are potential liabilities. Examples of contingent liabilities include Lawsuit, Product Warranty, Bank Guarantee, Change of Government Policies, and Liquidated Damages.

3. Expenses 

An expense in accounting is the money spent, or costs incurred, by a business to generate revenues. Essentially, the expenses of accounts represent the cost of doing business; they are the sum of all the activities that hopefully generate a profit. Examples of expenses that a company incurs in earning revenues are Sales commissions expense, Delivery expense, Rent expense, Salary expense, and Advertising expense. These are the types of expenses.

Cost of Goods Sold (COGS):-  The Cost of Goods Sold (COGS) is the cost of obtaining raw materials and converting them into finished products. It does not include selling and administrative costs incurred by the entire company, nor interest expense or losses on extraordinary items.

  • For manufacturing firms, COGS includes direct labor, direct materials, & manufacturing overhead.

  • For a service company, it is called a cost of services rather than the Cost of Good Sold.

  • For a company that sells both goods and services is called the cost of sales.

Operating Expenses (Selling/General and Admin):- Operating expenses are related to selling goods & services and include sales salaries, advertisements, and shop rents.

General and administrative expenses include expenses incurred while running the main line of business and include executive salaries, R&D, travel & training, and IT expenses.

Financial Expenses:- An expense is the cost of operations that a company incurs to generate revenue. As the popular saying goes, “It costs money to make money.” Common expenses include payments to suppliers, employee wages, factory leases, & equipment depreciation.

Extraordinary Expenses:- Extraordinary regular expenses are costs incurred for large one-time events or transactions outside the firm’s regular business activity. They include retrenchment of employees, selling land, or disposal of a significant asset.

Non-Operating Expenses:- These are costs that cannot be added back to operating revenues. Interest expense is the most common non-operating expense. Interest is the cost of borrowing money. Loans from banks usually require interest payments, but such payments do not generate any operating income. Therefore, they are classified as non-operating expenses.

4. Revenue 

Revenue is the amount a company receives from selling goods and/or providing services to its customers & clients. A company’s revenue, which is reported on the first line of its income statement, is often described as sales or service revenue. Hence, revenue is the amount earned from customers & clients before deducting the company’s expenses.

Operating Revenue:- Operating revenue is revenue that you get from the core activities of your business, such as sales. If you own a landscaping company, the operating revenue of your business is derived from your services. Or, if you own a pie shop, the operating revenue of your business comes from selling the pies.

Non-Operating Revenue:-  Non-operating revenue is money earned from a side activity that is unrelated to day-to-day activities of your business, like dividend income or profits from investments. Non-operating revenue is more inconsistent than operating revenue. You often make sales, but you cannot earn money from frequent side activities. Non-operating revenue is listed after operating revenue on the income statement.

4. Equity 

Equity is ownership of an asset of value. Ownership is created when the owner contributes to the financing of the asset purchase. Another way to finance the asset purchase is with debt. To measure your business equity, look at the relationship between your business’s assets and liabilities. These are the types of equity.

Stockholders’ equity:- Stockholders’ equity is known as shareholders’ equity, is the number of assets given to shareholders after deducting liabilities. It is common for businesses structured as shareholders’ equity corporations. To see how much money is available for a shareholder distribution, see Shareholders’ Equity. 

Owner’s equity:- Owner’s equity refers to the amount of ownership you have in your business. You can calculate the owner’s equity by deducting your liabilities from your assets. Owner’s equity shows you how much available capital your small business has. Owner’s equity is most common for a sole proprietor or business partner.

We hope this information will help you to understand the types of accounts in Accounting. You would also like to Read: 8 Key Benefits of Accounting Software. Learn its Importance & How it Helps Prevent Losses?

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