Course Title: Types of Major Accounts

Week No. 012 / Module 008

Lesson 8 – Types of Major Accounts

Content of the Module

1. The Types of Accounts in Accounting
2. Accounting Categories and Their Role
a. Assets Account
b. Expenses Account
c. Revenue or Income
d. Liabilities Account
e. Equity Account
f. Capital
g. Understanding Capital
h. Income

The Types of Accounts in Accounting

Accounting Categories and Their Role
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.
Asset accounts, for example, can be divided into cash, supplies, equipment, deferred
expenses and more. Equity accounts may include retained earnings and dividends. Revenue
accounts can include interest, sales or rental income.
The five major accounts relate to each other. If one changes, the others will change too.
For instance, if you purchase a new computer worth 1,000 with a loan, then both the Assets
and Liabilities accounts will increase by 1,000 each.
These accounting categories are relatively new. Traditionally, the accounts were classified
into four types: valuation accounts, nominal accounts, real accounts and personal accounts.
However, most companies nowadays rarely use this approach.

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Course Title: Types of Major Accounts
Week No. 012 / Module 008
(1) Assets Account
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.
An asset is an expenditure that has utility through multiple future accounting periods. If an
expenditure does not have such utility, it is instead considered an expense. For example, a
company pays its electrical bill. This expenditure covers something (electricity) that only
had utility during the billing period, which is a past period; therefore, it is recorded as an
expense. Conversely, the company buys a machine, which it expects to use for the next
five years. Since this expenditure has utility through multiple future periods, it is recorded
as an asset.
If an asset was purchased by an entity, it is recorded on the balance sheet. However, some
assets are acquired at such a low cost that it is more efficient from an accounting
perspective to charge them to expense at once; otherwise, the accounting staff must track
these assets through multiple periods, and determine when they have been consumed and
should therefore be charged to expense.
When assets are recorded on the balance sheet of a business, they are classified as being
either short-term or long-term assets. A short-term asset is expected to be consumed within
one year, while long-term assets are to be consumed in more than one year.

Examples of short-term assets are:

 Cash
 Marketable securities
 Accounts receivable
 Prepaid expenses

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Examples of long-term assets are:
 Land
 Buildings
 Office equipment
 Furniture and fixtures
 Software

(2) Expenses Account

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.
An expense is the cost of operations that a company incurs to generate revenue. As the
popular saying goes, “it costs money to make money.”
Common expenses include payments to suppliers, employee wages, factory leases, and
equipment depreciation. Businesses are allowed to write off tax-deductible expenses on
their income tax returns to lower their taxable income and thus their tax liability. However,
the Internal Revenue Service (IRS) has strict rules on which expenses business are allowed
to claim as a deduction.

Different Types of Expenses

There are two main categories of business expenses in accounting:
1. Operating expenses: Expenses related to the company’s main activities, such as the
cost of goods sold, administrative fees and rent.
2. Non-operating expenses: Expenses not directly related to the business' core
operations. Common examples include interest charges and other costs associated
with borrowing money.

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(3) 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.

(4) Liabilities Account

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.
Obligations of a company or organization. Amounts owed to lenders and suppliers.
Liabilities often have the word "payable" in the account title. Liabilities also include
amounts received in advance for a future sale or for a future service to be performed.
Liabilities are legally binding obligations that are payable to another person or entity.
Settlement of a liability can be accomplished through the transfer of money, goods, or
services. A liability is increased in the accounting records with a credit and decreased with
a debit. A liability can be considered a source of funds, since an amount owed to a third
party is essentially borrowed cash that can then be used to support the asset base of a
business.

Examples of liabilities are:

 Accounts payable
 Accrued liabilities
 Deferred revenue
 Interest payable
 Notes payable
 Taxes payable
 Wages payable
Liabilities are aggregated on the balance sheet within two general classifications, which
are current liabilities and long-term liabilities. You would classify a liability as a current
liability if you expect to liquidate the obligation within one year. All other liabilities are
classified as long-term liabilities. If you have a long-term note or bond payable, that portion

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of it due for payment within the next year is classified as a current liability. Most types of
liabilities are classified as current liabilities, including accounts payable, accrued liabilities,
and wages payable.

(5) Equity Account

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.

(6) Capital
Capital is a term for financial assets, such as funds held in deposit accounts, as well as for
the physical factors of production; that is, manufacturing equipment. Additionally, capital
includes facilities, including buildings used to produce and store manufactured goods.
Materials used and consumed as part of the manufacturing process do not qualify as capital.

(7) Understanding Capital

To be considered capital, the goods must provide an ongoing service to the business to
create wealth. Capital must be combined with labor, the work of individuals who exchange
their time and skills for money, to create value. By investing in capital and current
consumption, a business or individual can direct those efforts into future prosperity.
Tangible assets that function as capital within a business are subject to depreciation, which
occurs as normal wear and tear on an item diminishing its overall value. Depreciation is
often noted on a business’s financial statements and may be eligible for use as a tax
deduction.

Types of Capital
Here are the top four types of capital:
 Debt Capital

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A business can acquire capital through the assumption of debt. Debt capital can be
obtained through private sources, such as friends and family, financial
institutionsand insurance companies, or through public sources, such as federal loan
programs.
 Equity Capital
Equity capital is based on investments that, unlike debt capital, do not need to be
repaid. This type of capital can include private investment by business owners as
well as contributions derived from the sale of stock.
 Working Capital
Defined as the difference between a company's current assets and current liabilities,
working capital measures a company's short-term liquidity—more specifically, its
ability to cover its debts, accounts payable, and other obligations that are due within
a year. In a sense, working capital is a snapshot of a firm's financial health.
 Trading Capital
Trading capital refers to the amount of money allotted to buying and selling various
securities. Generally, trading capital is distinct from investment capital because it
is reserved for more speculative ventures. Trading capital is sometimes referred to
as "bankroll."

(8) Income
Income is money (or some equivalent value) that an individual or business receives in
exchange for providing a good or service or through investing capital. Income is used to
fund day-to-day expenditures. Investments, pensions, and Social Security are primary
sources of income for retirees. For individuals, income is most often received in the form
of wages or salary.
In businesses, income can refer to a company's remaining revenues after paying all
expenses and taxes. In this case, income is referred to as "earnings.” Most forms of income
are subject to taxation.
Understanding Income
Individuals receive income through earning wages by working and/or making investments
into financial assets such as stocks, bonds, and real estate. For instance, an investor’s stock

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holding may pay income in the form of an annual 5% dividend. In most countries, earned
income is taxed by the government before it is received. The revenue generated by income
taxes finances government actions and programs as determined by federal and state
budgets. The Internal Revenue Service (IRS) calls income from sources other than a job,
such as investment income, “unearned income.”

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References:
 https://bizfluent.com/info-10005386-five-types-accounts-accounting.html
 https://www.accountingtools.com/articles/what-is-an-asset.html
 https://www.accountingcoach.com/terms/L/liabilities
 https://www.accountingtools.com/articles/what-are-liabilities.html
 https://www.investopedia.com/terms/c/capital.asp
 https://www.investopedia.com/terms/i/income.asp