Account Categories in accounting explained

There are three different types of accounts in accounting. They are Real, Personal, and Nominal Account.

Real Account: A real account, or permanent account, is a general ledger account that does not close at the end of a period or at the end of the accounting year. There are five primary account categories in real accounts which are as follows:

 Asset Accounts

Liability accounts

Equity accounts

Expenses accounts

Income (Revenue)

Asset accounts: These accounts represent resources that a business owns or controls that can be expressed as a monetary value and contribute to profitability. Assets include Account receivables, inventory, equipment, prepaid expenses, marketable securities, current assets, cash, cash equivalent, furniture, investments, and intangible assets like Patents, Copyrights, Trademarks, Franchises, Goodwill, Trade names, reputation, R&D know-how, and software, etc.

Liability accounts: These accounts represent what a business owes to third parties such as  Accounts payable, Notes payable, Accrued expenses (credit expenses), Interest payable, Income tax payable, Unearned revenue (an amount a business owes), Mortgage payable, capital lease, other types of loan repayable, Current liabilities (short term liabilities), Bonds payable, Dividends payable, Deferred tax payable, deferred revenue (advance received for goods to be supplied), bank overdraft, debt payable, Pension Obligations, Contingent liabilities, Deposits from customers, Sales tax/GST payable, Debentures, lawsuits payable, product warranties, TDS (payroll taxes payable), etc.

Equity accounts: Equity is the amount funded by the owners or shareholders of a company for the initial start-up and continuous operation of a business. These accounts include common stock, preferred stock, contributed surplus, additional paid-in capital, retained earnings, other comprehensive earnings, and treasury stock. Equity is the amount funded by the owners or shareholders of a company for the initial start-up and continuous operation of a business. 

Expense accounts: An expense account is a record of an entity’s daily costs during a specific accounting period, such as a month, quarter, or year. Expense accounts are temporary and appear on a company’s income statement, also known as the profit and loss (P&L) statement. Some common expense accounts are Cost of sales, utility expense, discount allowed, cleaning expense, depreciation expense, delivery expense, income tax expense, insurance expense, interest expense, advertising expense, promotion expense, repairs expense, maintenance expense, rent expense, salaries, and wages expense. 

Revenue accounts: A revenue account is a financial account that records a business’s income and expenses for a specific period. Some common examples of revenue accounts are sales, service revenues, rent income, interest income, etc.

Personal Account: Personal Accounts relate to individuals, firms, companies, etc. Examples: Debtors, creditors, Banks, Outstanding accounts, prepaid accounts, accounts of customers, accounts of goods suppliers, capital, drawings, etc. Here, the giver and receiver will be individuals, firms, companies, etc.

Nominal account:  A nominal account is a general ledger account you close at the end of each accounting year. You store accounting transactions in a nominal account for one fiscal year. At the end of the fiscal year, you transfer the balances in the account to a permanent account. After closing, each nominal account starts the next accounting year with a zero balance.

Related Posts: