Accounting is a topic as vast as itself. It is a structured way of tracking money and its expenditure. For companies of all sizes, accounting has its use. Variety of Accounts definition according to accounting book but different authors, but main fundamental principles are same. So in this article, we will discuss Types of Accounts in Accounting, Rules, and fundamental concept.
In businesses, money comes in and goes out on really fast rates. Anything less structured and less complicated than accounting cannot suffice for the matter at hand.
As can be expected, there is not one niche but many that accounting is divided into. Considering that cash flow has many directions, a separate ledger is needed to maintain the flow and keep track of it.
Types of Accounting and Rules
Mainly Accounting types differentiate between personal, nominal, impersonal and real, but in this article.
However, accounting is divided into 6 main categories, these categories represent 6 different types of accounts in accounting relates to financial and cost.
Asset accounts represent an accumulated sum of all the assets that a company holds. This includes liquid and non-liquid assets.
Types of assets that are added to asset accounts include cash in hand, cash in the bank, accounts receivable, real estate owned by the company and inventory for retail businesses.
Everything that the company can sell for a given price is an asset and hence is added to the asset accounts.
Everything that a company is obliged to pay is a liability. For example, if an inventory is taken on credit, it means that the inventory is taken but it has not been paid for.
A fixed amount of time is thereafter which the inventory has to be paid for. Until that time, the inventory is a liability and its amount are taken into liability accounts.
Equity accounts include common stock, paid-in capital, and retained earnings. These include the amount that is kept as profit, and everything related to it.
The amount that is left after paying off liabilities is added to equities. For example, a company makes some money after a period of functioning and then it has to pay its employees.
- The value that is to be paid is taken as a liability and is subtracted from the assets.
Equity= Assets – Liabilities
Revenue and Income Accounts
They include sales, service revenue and interest income. These represent an amount that the company has made an income.
Revenue and Income is the amount that the company makes after a period of functioning, liabilities and other accounts payable are to be subtracted from this.
Expense accounts include the amount that the company has to pay as an expense. This amount cannot be credited as a liability because the components are not held as liabilities.
- They include utilities, rents, depreciation, interest, and insurance.
- Rent in some cases can be a liability if it is not paid in advance.
In some cases, depreciation or other factors may lead to negative balances and hence causing ambiguities in the statements.
- In order to overcome this, contra accounts are needed for such entries.
Examples include accumulated depreciation and allowance for bad debts.
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