There are 5 major types of accounts, namely Capital, Liability, Expenses, Assets, Revenue. The main purpose of them is to define the flow of money in your company, either it spent or received. Additionally, each category can be divided into some groups. For instance: Liabilities can be long-term and short-term, according to the period of time to be paid. Another important point is the dependence of five accounts from each other. If you obtain a piece of new equipment worth $800 with a loan, then both the Liabilities and Assets accounts will increase for $800 each. Further, let us consider each of the classes in more detail.
The capital account outlines the current worth of your business. It is equal: C=A-L means total assets deducting total liabilities. The balance in the capital account increases with the introduction of new capital and profits earned by the business and decreases as a result of withdrawals and losses sustained by the business. Cash provided by the owner for starting a business will be captured in a Capital Account.
This type of account shows all debts and obligations which must be paid for creditors or other third parties to which company owes money. As was mentioned earlier, it can be classified for current and long-term debts, where current have to be paid less than twelve months, long-term more than twelve. Mortgages, car loans, a loan from a bank are recorded in the Liability Account.
Generally, Expenses account refers to all costs involved in conducting business. Any product or service that your company purchases to generate income or manufacture goods is considered an expense. But all spending can be classified into two groups: Direct and Indirect. Direct expenses entirely related to the main business operations of the company, and involves wages, cost of raw material, cost of transportation. Indirect expenses not totally related to the main business operations, but essential to keep the business running, involves electricity, petrol, salaries, repair.
The account refers to all resources that the company owns. Can be classified for current and fixed, based on the period of owning, and for tangible and intangible assets. As an example: Cash, building, machinery, inventories and other types of physical owning are tangible assets. Non-physical assets usually include: trademarks, copyrights, patents and are considered as intangible. These accounts are maintained separately, to record any increase or decrease in tangible or intangible assets.
Under this type of account keep the money that the company earns. Can be divided for direct and indirect, where direct is income from business (sales of goods and services), and indirect are other sources of income, example: Interest Rate, rental income, commission income. Usually, businesses maintain separate accounts for revenues and all incomes made by them.
By Adil Maidanov | 12th November 2020