Accounting Basics: Types of Accounts

Study Notes

Account Definition

An account is a record of financial transactions.
It summarizes increases and decreases in assets, liabilities, and equity.
Accounts are categorized into different types, such as asset, liability, and equity accounts.

Types of Accounts

Asset Accounts: Represent resources owned that offer future economic value.
- Examples: Cash, Accounts Receivable, Inventory, Equipment.
- Normal balance is a debit.
Liability Accounts: Represent obligations to others.
- Examples: Accounts Payable, Salaries Payable, Loans Payable.
- Normal balance is a credit.
Equity Accounts: Reflect the owners' stake in the business.
- Examples: Common Stock, Retained Earnings.
- Normal balance is a credit.
- Contributed capital (common stock, preferred stock) increases with credit.
- Retained earnings increases with net income and decreases with net loss.
Revenue Accounts: Track increases in equity from business activities.
- Examples: Sales Revenue, Service Revenue.
- Normal balance is a credit.
Expense Accounts: Represent resource outflows used to generate revenue.
- Examples: Rent Expense, Salaries Expense, Utilities Expense.
- Normal balance is a debit.

Account Structure and Balancing

Accounts have debit and credit sides.
Debit increases asset and expense accounts while decreasing liability, equity, and revenue accounts.
Credit increases liability, equity, and revenue accounts while decreasing asset and expense accounts.
The fundamental accounting equation (Assets = Liabilities + Equity) must always balance.
The double-entry system ensures this balance.
Account balances are found by summarizing all debits and credits recorded in the account.

Account Usage

Accounts track individual transactions within a business.
This allows for monitoring the flow of money and resources.
Each transaction impacts multiple accounts.
Businesses use these records to create financial statements, including the balance sheet (assets, liabilities, equity), income statement (revenues, expenses, net income/loss), and statement of cash flows (cash inflows and outflows).

Account Maintenance

Maintaining accurate accounts is crucial for sound financial record-keeping.
This involves timely and accurate recording of all transactions.
Proper journal entries help maintain accurate records.
Internal controls ensure account integrity and reliability.
A trial balance, listing account balances, is prepared periodically to assess accuracy and ensure debits equal credits.

Account Closing

At the end of an accounting period, some accounts (temporary) need closing.
Temporary accounts (revenues and expenses) are closed to retained earnings.
Permanent accounts (assets, liabilities, equity) are carried forward.

Description

This quiz covers the fundamental concepts of financial accounts, including asset, liability, and equity accounts. Test your understanding of how each account type reflects financial transactions and their normal balance. Ideal for accounting students looking to solidify their foundational knowledge.