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A Quintessential Guide on Different Types of Accounts in Accounting

Types of Accounts In Accounting

Probably you have heard about credits and debits. Right? Maybe you also know that they increase or decrease. But, do you know the accounts which they affect and how much they can affect? If your answer is no, you are at the right place. In this blog, we will explain to you different types of accounts with example. Also, we will explain to you how credits and debits affect those accounts in detail.

In accounting, an account plays a vital role. It is a functional unit, recognized by an account number that follows a distinct accounting purpose where one person has prime responsibility for it.

What is An Account?

The account is an outline of the transactions initiated by the business in respect of persons, their representatives, and things.

For example, when a business lists into transactions with customers or suppliers, both customers and suppliers treat as separate accounts.

In the same way, companies buying tangible things like machinery, building, plants, land, etc. and treat each of the tangibles as separate accounts.

It means whenever a business undertakes transactions, it should classify the accounts connected and then apply the essential accounting standards.

Additionally, an account is represented in a T-Format. T Account has two sides to it. The left side is an account that is labelled as the debit side whereas the right side is recognized as the credit side. Usually, businesses list their accounts by building a chart of accounts (COA). A chart of accounts allows you to manage your account types, each account number, and hassle-free locate transaction information.

Types of Accounts in Accounting:

Although there are many types of accounts in business’s books but every account falls under the following sections:

  • Assets
  • Expenses
  • Liabilities
  • Equity
  • Revenue

1. Asset account:

The account kept the record of asset transactions is called an asset account. Now the question that may come into your mind is what an asset for a business is.

What is an asset for a business?

Either physical or non-physical type of property that adds value to a business is considered as asset. There are many types of assets but usually, we categorize them in the following classes:

  • Current or Liquid Asset
  • Fixed or Non-current Asset
  • Tangible Asset
  • Intangible Asset
  • Operating Assets
  • Non-operating Assets

Current or Non-Current Assets:

If we categorize assets based on their convertibility into cash, we can divide them into current assets or fixed assets. An alternative interpretation of this concept is long-term vs. short-term assets.

Current Assets:

These are the assets that can be converted into cash or cash equivalents easily. We can call them liquid assets as well.

Some of the examples of current assets are as follows;

  • Cash equivalents
  • Cash
  • Office supplies
  • Accounts receivables
  • Marketable securities
  • Short-term deposits
  • Inventory

Fixed or Non-Current Assets

These are the assets that cannot be converted into cash or cash equivalents easily. We can call them long-term assets or fixed assets as well.

Some of the examples of non-current assets are as follows:

  • Machinery
  • Patents
  • Trademarks
  • Building
  • Land
  • Equipment

Tangible or Intangible Assets:

If we categorize assets based on their physical existence, we can divide them into tangible assets or intangible assets.

Tangible Assets

The assets that have a physical existence means we can feel them, we can touch them or we can see them are called tangible assets.

Some of the examples of tangible assets are as follows:

  • Equipment
  • Machinery
  • Office supplies
  • Marketable securities
  • Inventory
  • Land
  • Building
  • Cash

Intangible Assets

The assets that haven’t a physical existence mean we can’t feel them or touch or see them but quite imperative for a business are called intangible assets.

Some of the examples of intangible assets are as follows:

  • Brand
  • Trademarks
  • Licenses and permits
  • Goodwill
  • Patents
  • Trade secrets
  • Copyrights
  • Corporate intellectual property

Operating or Non-operating Assets

If we categorize assets based on their purpose or usage, we can divide them into operating assets or non-operating assets.

Operating Assets:

The assets that are essential for daily operation of a business are called operating assets.

An alternative explanation – Assets that are used to generate revenue from a core activities of a business are called operating assets.

Some of the examples of operating assets are as follows:

  • Inventory
  • Cash
  • Equipment
  • Goodwill
  • Accounts receivable
  • Copyrights
  • Machinery
  • Building
  • Patents

Non-Operating Assets:

The assets that not required for daily business operations but can still generate revenue are called non-operating assets.

Some of the examples of non-operating assets are as follows:

  • Marketable securities
  • Fixed deposit
  • Short-term investments
  • Vacant land

2. Expense Accounts

In accounting, an expense is defined as the money spend by a business to generate revenue. Typically, expense accounts show the cost of operating a business. It represents the sum of all activities to generate a profit in a business.

Additionally, we can say, an expense is a cost that has been taken up by activities that support revenue generation. Cost is the monetary measure (cash) that has been given up to purchase an asset.

Hence, all expenses are costs, but all costs are not expenses.

Different Types Of Expenses:

Expenses are categorized into two ways:

  • Operating vs. Non-Operating
  • Fixed vs. Variable

Operating Expense:

The expenses that a business acquires to keep it running are called operating expenses. These expenses do not add with the cost of goods sold such as materials, direct labour, manufacturing overhead, or capital expenditures like larger expenses such as buildings or machines.

Some of the examples of operating expense are as follows:

  • Salaries, benefits, and wages
  • Rent and insurance
  • Marketing, advertising, and promotion
  • Depreciation and amortization
  • Selling, general, and administrative (SG&A)

Non-Operating Expense:

The list of expenses that separate from the core operations of a business is called non-operating expenses. Sometime to determine the performance of business, accountants exclude the non-operating expense along with ignoring the effects of investment & unrelated concerns.

Some of the examples of non-operating expenses are as follows:

  • Interest
  • Taxes
  • Impairment charges

Fixed Expense

A fixed expense is an expense whose total amount does not vary when there is an addition to any activity such as sales or production.

Some of the examples of fixed expenses are as follows:

  • Salaries, benefits, and wages (sometimes fixed and sometimes variable)
  • Rent
  • Telephone and internet costs
  • Loan Payments
  • Insurance
  • Depreciation expense for the buildings, fixtures, and equipment

Variable Expense

These are the expenses whose total amount vary when there is an addition to any activity such as sales or production.

Some examples of variable costs include:

  • Direct labour
  • Taxes
  • Operational expenses
  • Commissions

3. Liability Accounts

In accounting, liabilities represent the company’s financial obligations or what a business owes. In other words, these are expenses you have incurred but have not yet paid.

Types Of Liabilities:

Usually, liabilities are divided into two parts current liabilities and non-current liabilities.

Current liabilities:

Current liabilities are debts that become due within the year. These are also called short-term liabilities.

Some of the examples of current liabilities are as follows:

  • Accounts payable,
  • Principal and interest on a bank loan
  • Notes payable that are due within one year
  • Mortgages payable
  • Salaries and wages payable in the next year
  • Payroll taxes
  • Income taxes payable

Non-Current Liability:

Non-current liabilities are the financial obligations that are expected to be paid after a year. These are also known as long-term liabilities.

Some of the examples of non-current liabilities are as follows:

  • Principal and interest payments due more than a year from now
  • Lease payments that aren’t due for more than a year
  • Bonds, debentures, and long-term loans
  • Pension obligations
  • Mortgage, equipment, and other capital payments that aren’t due for more than a year
  • Deferred tax liabilities

4. Equity Accounts

Equity accounts give the financial description of the ownership of a business. All equity accounts have natural credit balances except the treasury stock account. In a case, if the retained earnings account has a debit balance, this signifies that either a business has been undergoing losses, or the business has issued more dividends than it had available through retained earnings.

Types Of Equity Account:

There are 6 types of equity accounts:

  • Common Stock
  • Preferred Stock
  • Contributed Surplus
  • Additional Paid-In Capital
  • Retained Earnings
  • Treasury Stock

Common Stock or Common Equity

Common Stock is the account that represents the shares entitle the shareowners to vote and their residual claim on the business’s assets. Generally, this equity has fewer rights linked with it than preferred equity.

Preferred Stock or Preferred Equity

Preferred stock is very similar to common stock. It is a type of share that usually has no voting rights, but is declared a cumulative dividend. The most important feature of preferred stock is a fixed dividend payment that makes it more reliable investment for investors.

Contributed Surplus

Contributed Surplus shows the amount paid over the par value paid by investors. Also, this account holds various types of earnings and losses resulting in the sale of shares or other complex financial instruments.

Additional Paid-In Capital

It is the amount paid by investors more than par value on stock sold instantly to them by the issuer. The balance in this account can be considered substantial because of the minimal par value amounts allowed to the most stock certificates.

Retained Earnings

Retained Earnings are the part of net income that is not compensated as dividends to shareholders. Rather it is retained for reinvesting in the business or it is the amount to pay off future obligations.

Treasury Stock

It is considered a contra account that includes the amount paid to investors to purchase shares back from them. Usually, this account has a negative balance and hence lessens the total amount of equity.

5. Revenue Accounts:

Revenue is the amount that a company earns from selling goods or/and products to its customers. Or it is the amount a company receives by offering services to its clients or customers. In simple words, revenue indicates the revenue of products or services.

Types Of Revenue:

Revenue is categorised into two parts:

  • Operating Revenue
  • Non-Operating Revenue

Operating Revenue

It is the revenue that a company receives from the core activities of business for example sales. If the company is service based, then the operating revenue is generated from the services (by providing services). Whereas if the company is product based, then the operating revenue is generated from selling the products.

Some of the example of operating revenue are as follows:

  • Sales
  • Rent
  • Consulting services

Non-Operating Revenue

It is the revenue that a company receives from side activates. Side activities are unrelated to day-to-day activities of a business such as dividend income or profits from investments.

**Operating revenue is more consistent than non-operating revenue.

Some of the example of non-operating revenue are as follows:

  • Interest income
  • Dividend income
  • Profit on sale of investments

Final Words:

These are must-to-know accounts in accounting. We hope this information will help you to understand different types of accounts.

Also, to operate a business successfully, it is essential to choose a right accounting method. If you want to manage your all accounts hassle-free and explore the best accounting method, HostBooks Limited can assist you. We have easy-to-use and highly-scalable accounting software that can organize your different types of accounts professionally. Then what are you waiting for? Call us and start a free trial today!

 

 

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