There are five main types of accounts in accounting, namely assets, liabilities, equity, revenue and expenses. Their role is to define how your company’s money is spent or received. Each category can be further broken down into several categories.
The assets account includes everything that your company owns. Assets are divided into tangible and intangible. 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.
When you’re starting a business, it’s your responsibility to list the types of assets that your company has. Every time you purchase new products, add them to your list. Let your accountant know about it so he or she can deduct any expenses that are considered necessary for your business.
Any product or service that your company purchases to generate income or manufacture goods is considered an expense. This may include advertising costs, utilities, rent, salaries and others. Some expenses are deductible and help reduce your taxable income.
For example, you may deduct direct labor costs and business-related travel costs, but you cannot deduct personal expenses, donations, exchange loss and penalties.
Revenue or Income
Revenue, one of the primary types of accounts in accounting, includes the money your company earns from selling goods and services. This term is also used to denote dividends and interest resulting from marketable securities.
Liabilities include the debts or obligations payable to creditors and other outsiders to which your company owes money. These can be loans, unpaid utility bills, bank overdrafts, car loans, mortgages and more.
The equity account defines how much your business is currently worth. It’s the residual interest in your company’s assets after deducting liabilities. Common stock, dividends and retained earnings are all examples of equity.
After recording these transactions, your accountant will make a balance sheet. This information will provide a snapshot of what your business owns and owes. It reflects your company’s financial position and offers valuable insights into its overall performance.