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What are the Different Account Types in Accounting?

Posted by Kashoo Team on December 16, 2013 at 1:15 PM

This is the second part in an ongoing series of articles diving into accounts and how they are used in the context of accounting.

When you first setup your business in Kashoo you are presented with a default chart of accounts. This default list represents some of the most common account types used across most businesses. That said, you may want to add or remove particular accounts to suit the needs of your business special needs. (After all, it is as unique as a snowflake.)

Setting up all of your accounts is the first step to a smooth and efficient experience in Kashoo. But before we get going, we recommend a quick read on the basics of what an account in accounting is.

All set? Good. Let's go!

Arguably the most important part of bookkeeping is keeping track of your earnings and spendings: the two main types of accounts in an accounting system are income and expenses. Different types of income can be taxed differently and by categorizing your income and expenses you can optimize these for your business and increase your profit margins. In order to take full advantage of tax regulations, business owners in most countries need to track their business expenses in categories such as office supplies or meals and entertainment.

There is also a third type of account that is important to mention and that is a liability account. A liability account is used to track things that are basically the opposite of an asset—a thing that actually costs you money to get rid of. The most common types of liabilities are credit issued from a vendor or a bank (lines of credit, credit card debt, accounts payable, etc.).

Account types in accounting.

Cash Accounts

A cash account is the easiest way to record cash payments, deposits and withdrawals. We would use this option in Kashoo when entering income or expenses received in cash under Terms or Payments Accounts. This will show that you were paid in cash or that you paid for something in cash. A common scenario where the payment terms would be cash is when a business owner accidentally paid an expense from their personal credit card. In this case, many business owner might choose to say they have paid for this expense with cash since their personal credit card is not tracked for business purposes.

Bank Accounts

We use this account type to refer to bank accounts that are used for the purpose of running your business. A common example would be a small business that has a checking account where money can be deposited and used for bill payments and incidental expenses. Another use case would be a savings account where a business puts aside some money to cover the taxes they might owe the government at the end of the year.

If you have any other questions about this type of account you can read more about it here: Bank Accounts.

Credit Cards

A credit card is an indispensable tool for a small business owner. In fact, it is quite normal for a small business owner to have multiple credit cards.

Credit cards are great for keeping tracking of expenses because many credit card companies will send you a statement at the end of the month with details of your business expenses. This provides an excellent opportunity for you to check to see if the expenses you have entered into your online accounting software can match up with the credit card statement.

Undeposited Funds

A common practice is for a business to collect cash and checks into an envelope and deposit them all in one lump sum. When this happens it appears on the bank statement as one transaction. To deal with this in Kashoo we record that transaction in Undeposited Funds and then transfer the specific amounts of each item from the original deposit into the appropriate account. Following this protocol ensures that when performing a bank reconciliation, the transaction date and amount will match a line on the bank or credit card statement.

Income Accounts

Income accounts are used to track the source of income so that a business owner can track where their money is coming from. As an example, Habitsoft Inc. began as a custom software development company that also provided a consulting service. When setting up their accounts they created three different income accounts:

  • Software Development Income
  • Consulting Income
  • Interest Income (for interest paid by the bank on any positive balances)

In most cases it's also a good idea to create a Other Income category for things that you are not sure about and you can consult with your accountant later on.

Expense Accounts

An expense account is meant to represent a category of expenses for the business. Basically, any type of product or service that does not have a resale value is an expense. If you are paying for an item that can be resold it should be recorded as an asset.

Before setting up your expense accounts it is a good idea to consult your local tax laws as they may have certain categories you will have to adhere to (examples of these would be things like office supplies, meals & entertainment, telecommunications, etc.).

When you sign up for Kashoo, a list of expense accounts are automatically included. Review this list to see if it is aligned with your local tax laws and add any expense categories you feel are necessary.

Assets

The asset account represents the value of the assets owned by the business. Only items that have a resale value should be recorded in this account. Every year the assets are adjusted to accommodate depreciation or appreciation of their value (examples of assets would be furniture, computers, real estate, etc.).

Liabilities

A liability account represents a type of debt or upcoming cost for the business. The type of liability determines the duration of the debt.

Equity

An equity account represents the net worth and ownership of the business. Examples of these accounts include owner investments, retained earnings, common stock.

Accounts Payable

Accounts payable represents the money that the business owes. Accounts payable usually comes in the form of bills or invoices from others vendors or service providers.

Accounts Receivable

Accounts receivable represents the money that is owed to the business. Accounts receivable is usually in the form of outstanding invoices issued by the business that have not yet been paid.

Cost of Goods Sold

The cost of goods sold is the cost that goes into creating the product that the business sells. The only costs included here are those that are directly tied to the production of the products. For example, raw material and labour used to produce a physical product would be included in the cost of goods sold; however, the cost of shipping the finished product to the retailer where it was sold would not.

Gain or Loss on Foreign Exchange

This account is used to track the gains or losses caused by a change in value of foreign currencies between the time an invoice is issued and when it is paid.

 

And there you have a high-level overview of the different types of accounts used in an accounting system. And as always, if you have any questions our support team is here to help. Contact us at answers@kashoo.com or on Twitter at@KashooOnline.

 

Topics: Accounting