2. Types of Accounts

Think of an account as an individual file in your filing cabinet. For example, the account called “Furniture” would list all of the amounts spent on office furniture. The amounts are arranged in chronological order with increases in the value of office furniture on the left-hand (debit) column and decreases in the value on the right-hand (credit column).

       Example        

       This example shows the appearance of the account named “Furniture”.
 
Assets

An asset gives the value of things owned by the business. People or businesses that owe you money are your assets. Examples of assets are:

  • Petty cash
  • Checking account balance
  • Property owned by business
  • Furniture and fittings
  • Customers
  • etc.
 
Liabilities

A liability is the opposite of an asset. It is people or businesses to whom your business owes money. Examples of liabilities are:

  • Credit card accounts
  • Loan accounts
  • Suppliers
  • etc.
 
Income

Sales Income  (Total Income)

This is the total income for all sales of goods or services provided after taxes have been deducted. The bookkeeper might decide to keep different accounts for different types of sales – e.g. “Car Sales”, “Caravan Sales”.

Non-Operating Income 

This section is for income that is not directly related to the day-to-day operation of the business. Suppose the business invests surplus funds or rents out surplus office space. The income from this type of venture would be classified as “Non-operating Income”.

 
Expenses

Expenses are those monies that you pay or bills that you receive for goods or services received – again, after tax has been deducted.

Cost of Sales

If a cost can be related directly to a particular sale or to a service rendered then it is classified as a “cost of goods sold” or COGS. Take, for example, a pair of shoes sold. Cost of sales expenses would include the wholesale cost of the shoes, freight costs, commissions paid, etc.

Operating Expenses

These are more general expenses that are difficult to relate to a particular sale. Examples are phone costs, bank charges, etc.

Non-Operating Expenses

There might be some costs that are not directly related to the day-to-day profitability of the business. Interest on loans and income tax are just two examples of such expenses.

 
Equity

The owner probably invested a large sum of money to start the business going. If the business is ever sold, he or she would expect to be repaid this investment. Hopefully, the business will make a profit each year and this amount will be added to the amount owed to the owner.

Operating Equity

Profits accumulated each year are owed to the owner and appear on the right-hand column of this account. Amounts that the owner (proprietor) has taken out of the business (drawings) appear on the left-hand column of this account.

Financing Equity

This is the capital that the owner invests into the company . This investment normally happens at the start-up of the business but it can also happen at a later stage.

 
The Chart of Accounts

This is the complete list of accounts being used by the business. Some bookkeepers decide to create their own accounts and the chart of accounts would only show the actual accounts that are used in the business. The bookkeeper might decide to use the default chart of accounts provided by the software package Express Accounts. Whatever the choice, it is important that the bookkeeper feel free to add new accounts to match the requirements of the business. Some notes in this regard are:

  • Every account should be associated with an account number. This is usually a 4 digit number that indicates the type of account and the position of the account in final reports. Some systems allow an account to be specified by number rather than name.
  • Some accounts are important but are not directly used by the bookkeeper. If the bookkeeper uses the invoicing system in Express Accounts, then new customers are added to the list of customers in the invoicing system. These customers do not individually appear in the reports for the business – the data instead is summarized under an account called “Accounts receivable”.  In a similar way, purchases on account are not listed individually but are collected together under “Accounts Payable”.

Express Accounts Uses the following Default Chart of Accounts :

The default chart of accounts is the list of accounts that you start with. It is very easy to add new accounts, and this should be done to make your list more relevant to your business. Unused accounts do not appear in reports and will not “clutter” the system.

 
  • Header Accounts. Header accounts relate to a group of sub accounts. The sub-accounts are normally defined by the numbering system that you use. The amount shown as a total for the header account is the sum of the totals for the sub-accounts.  For Example “Advertising” might be a header account with “TV advertising”, “Google advertising” and “Newspaper Advertising” as the sub-accounts:

 

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