1.2 Types Of Accounts

  1. Assets are resources or things of value owned by the business entity. They are resources that will be used up as a expense over the period or periods. The common examples are shown in the Chart of Accounts. The sub-classification of the Asset category is discussed in Chapter 5. Some frequently used assets are:

    1. Cash-in-bank – coins and currencies deposited in the business account. Refer to Chapter 4 for Bank Reconciliation.

    2. Petty Cash - used for small disbursements of Cash. Refer to Chapter 4 for further discussions.

    3. Accounts Receivable – arises from money to be received in the future for professional services rendered by the business or sales of merchandise on account.

    4. Notes Receivable – arises from money to be received in the future for professional services rendered by the business or sales of merchandise evidenced by a promissory note.

    5. Supplies – examples are the medical supplies or office supplies which are being used in the business to conduct daily operations to generate revenue.

    6. Prepaid Assets – examples are Prepaid Insurance and Prepaid Rent, which arises out of paying in advance a future expense that will be incurred.

    7. Equipment – assets that have a life of longer than one (1) year and have been purchased to help operate the business and generate the revenue.

  2. Liabilities are obligations or debts owed by the business entity. They are obligations that will have to be paid within one year or over a year to creditors. They may be evidenced by accounts or notes used as collaterals for the obligations. The sub-classification of the Liability category is discussed in Chapter 5. Most liabilities have the last name "Payable" to distinguish its nature of obligation. The first name of the Payable will determine the nature of the transaction.

  3. Owner's Equity is the net worth of the business entity. It is the value of a right or financial interest in the asset or assets of the business entity. The Owner's Capital account represents the investment of the owner, whether cash or non-cash. The Owner's Draw account represents the asset withdrawal of the owner, whether cash or non-cash.

  4. Revenue is the income generated in the rendering of service or the selling of merchandise of the business entity. The most common examples relate to the kind of business. For a service business, Professional Fees account is used in the Practice Set. For a merchandising concern, the Sales Revenue is used.

  5. Expenses are the ordinary, necessary and legitimate costs incurred to generate the revenue. The last name "Expense" must be used to identify an item as an expense. The first name will determine the nature of the transaction for which the expense was incurred. Normally, the lists of the Expense accounts are in numerical order found in the Chart of Accounts. This makes it easier to locate a particular expense item from the list.

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