Demystifying Your Accounts - Part 2 Account Categories

... back to syllabus

26 Sep 2013

In part one we covered off “Journal Entries” which are the building blocks of your accounts. These journals go into “Accounts” which can be loosely categorised into 5 types

  1. Revenue or Sales
  2. Expenses 
  3. Assets
  4. Liabilities
  5. Equity or Capital

1. Revenue or Sales

Revenue is money that the company has collected from customers. It's actually just a sub-category of retained earnings, since revenue is a part of profit. So when you categorize something to revenue, you're actually categorizing it to equity. 3. Assets

2. Expenses (or Costs or Overheads)

Expense is money that is paid out from the company to keep the business running. It's also a sub-category of retained earnings, since cost is a part of profit too. Expense must be differentiated from investment. With an expense, the company gets a one-time benefit from the money spent. With an investment, the company will get a lasting benefit from the money spent. Investments get categorized as assets, not expenses. Simply put an asset is something owned by a business. Obvious examples are Cash, Equipment. But also money owed by a customer for example is also an asset. Money owed to the company is generally termed a “Debtor” which is a type of asset.

3. Assets

Simply put, an asset is something that a business owns which can effect to derive an economic benefit from, nor or in the future. Common examples are Property, Machinery or Cash in the Bank. Other assets can be Accounts Receivable (or Trade Debtors): When you invoice for goods or services on credit the amount owed to instantly becomes a Receivable, and therefore an asset. Once it is paid,it transfers from Receivables to Cash at Bank, which is still an asset. 

Stock, or inventory, which you have bought but not yet sold is an asset. This normally valued at the lower of cost or value.

4. Liabilities

Of course, the money for everything that a company owns must have come from somewhere. Very often, you'll take out a loan to buy things. These loans are called liabilities; it's money that you need to pay back to someone in the future. One particularly common type of liability is accounts payable or trade creditors; it's money that you owe to a supplier when they sell you a product or service up front and ask for payment later. When you get your electricity bill at the end of the month and are given 30 days to pay, that's accounts payable (or trade creditors).

When a business owner introduces funds into a business, it can either be classed as a Loan, in which case it’s a Liability, or more commonly it will be classed as Equity or Capital.

5. Equity or Capital

Equity or Capital is money that came from the owners of the company. The key distinction with Liabilities is that there's usually no expectation that this will be paid back. A few common accounts of this type are:

Ok, that's it for part 2. Keep an eye on the blog or @cloudacco for details of part 3 which should along at the start of October,