The Five Types of Accounts in Accounting
The assets account includes everything that your company owns. Examples of tangible assets include desktop computers, laptops, cars, cash, equipment, buildings and more. Your trademark, logo, copyrights and other non-physical items are considered intangible assets. For instance, if you purchase a new computer worth $1,000 with a loan, then both the Assets and Liabilities accounts will increase by $1,000 each.
It’s the real accounts that show the assets, liabilities and owner’s equity in a company. I bet you’d like to have a few examples of real accounts, wouldn’t you? Cash, accounts receivable, accounts payable, notes payable and owner’s equity are all real accounts that are found on the balance sheet. Whenever an accounting transaction is created, at least two accounts are always impacted, with a debit entry being recorded against one account and a credit entry being recorded against the other account. There is no upper limit to the number of accounts involved in a transaction – but the minimum is no less than two accounts.
Depending on the applicable accounting standards, the assets that comprise the total assets category may or may not be recorded at their current market values. All accounts that normally contain a credit balance will increase in amount when a credit (right column) is added to them, and reduced when a debit (left column) is added to them. The types of accounts to which this rule applies are liabilities, revenues, and equity. All accounts that normally contain a debit balance will increase in amount when a debit (left column) is added to them, and reduced when a credit (right column) is added to them. The types of accounts to which this rule applies are expenses, assets, and dividends.
It’s there from the very first business day to the very last business fundamental accounting equation day. Most of the real accounts show up on a company’s balance sheet.
If a business buys raw material by paying cash, it will lead to an increase in the inventory (asset) while reducing cash capital (another asset). Because there are two or more accounts affected by every transaction carried out by a company, the accounting system is referred to as double-entry accounting.
- In this lesson, we will be discussing two classifications of accounts – real accounts and nominal accounts.
- If assets are classified based on their convertibility into cash, assets are classified as either current assets or fixed assets.
The accounting equation forms the foundation of the double-entry accounting and is a concise representation of a concept that expands into the complex, expanded, and multi-item display of a balance sheet. The balance sheet is based on the double-entry accounting system where total assets of a company are equal to the total of liabilities and shareholder equity. The accounting equation is considered to be the foundation of the double-entry accounting system. The accounting equation shows on a company’s balance sheet whereby the total of all the company’s assets equals the sum of the company’s liabilities and shareholders’ equity.
You can offset the two invoices by creating a bank account specifically for the contra entry. This means when you record the invoices as being paid, it doesn’t affect your current bank account balance.
Owner’s equity accounts sit on the right side of the balance sheet, such as common stock and retained earnings. They are treated exactly the same as liability accounts when it comes to journal entries. Liabilities are items on a balance sheet that the company owes to vendors or financial institutions.
Recording Debits and Credits for Liability and Owner’s Equity Accounts
The accounting equation is used in double-entry accounting. It shows the relationship between your business’s assets, liabilities, and equity.