There are five different types of accounts which we will outline below.
Different types of accounts fulfill different purposes but are all related.
1. Income Accounts
These accounts relate to the sales/revenue earned from selling goods or services and generally have a credit balance. A business owner/manager will want to see an upward trend when analyzing this account.
Income accounts affect the Profit and Loss Report.
Amazon and Shopify sales revenue, for example, will be coded to an Income Account.
2. Expense accounts
These accounts are made up of expenses such as rent/wages/electricity etc, that reduce the profit for the business. Some expenses are deductible which can help reduce the taxable income.
This depends on the type of business you operate and the tax regimes within the country. Expense accounts generally have a debit balance and affect the Profit and Loss Report.
For instance, Amazon Commission or Shopify Fees will be coded to an Expense Account.
3. Asset Accounts
These accounts generally have a debit value and are made up of assets that will have a value. They are split into Tangible (physical items) and Intangible (non-physical) assets.
Examples include laptop computers, goodwill, cars, cash, buildings, inventory.
If money is owed to the business (products bought on credit), then the amount owed will sit on a debtor account which is an Asset Account.
A bank account is also considered an asset account provided that an overdraft facility is not available. Asset accounts make up the Balance Sheet Report and are not visible on the Profit and Loss Report.
If you are utilizing the Cost of Goods Sold feature within A2X, the inventory account assigned in the COGS tab will be an Asset Account.
4. Liability Accounts
These accounts are the debts of the company owed to creditors and other outsiders of the business and will generally have a credit value. Postings made to a liability account will appear on the Balance Sheet rather than the Profit and Loss Report.
If you purchase stock on credit terms and have not settled the amount due, it will sit in a Liability Account called Creditors.
5. Capital Accounts
These accounts will represent the amount of capital invested into the business by the owners. The capital account denotes what the company is currently worth. If the company makes a profit, the Capital Account will increase by that amount.
If the business is solvent and trading, this account will be a credit balance. If the balance has a debit balance, it can mean serious trouble for the future of the company.
Please note: This is NOT an account. It is a listing of all the balances in the ledger.
Prior to computerized systems, a review of the trial balance was recommended at the end of every month because, if there was a mistake, only a months’ worth of entries would need to be checked.
With the introduction of systems such as Xero and QuickBooks Online, it is nearly a guarantee that the trial balance balances. The trial balance will check if the debits equal the credits, but will not guarantee that the posting has been made to the correct account.
If for some reason the Trial Balance does not balance, you will need to review each transaction throughout the period, to ensure that each credit entry has an equal and opposite debit entry.
Hint: If you are in chat and wish to view the article outside of the chat window, please click HERE