Types of Accounts
An account is a record that provides information about a given asset, liability, equity, revenue, or expense.
There are two main types of accounts, which we will cover in more detail in the next sections:
- Permanent accounts, which are a company's assets, liabilities, and equity.
- Temporary accounts, which are a company's revenue and expenses.
Permanent Accounts
Permanent accounts are accounts whose balances carry over from one accounting period to the next accounting period. There are three categories within this permanent account classification:
- Assets
- Liabilities
- Equity
Assets are physical or non-physical resources owned by an organization that have economic value--resources like cash, inventory, and equipment.
Liabilities are the debts and other financial responsibilities of an organization, like accounts payable and loans payable, if money is owed to the bank, for instance.
The last category, equity, is the remaining value, once liabilities are subtracted from assets; think of this as the owner's capital accounts, retained earnings, or owner's draw.
Temporary Accounts
The other main type of account are temporary accounts, which are accounts whose balances are closed at the end of an accounting period, and reopened at the beginning of the next period.
There are two types of temporary accounts:
- Revenues, which are earnings from interest or from the sale of goods or services.
- Expenses, which are costs associated with operating or maintaining a business.
Now, why do we consider these accounts temporary? It's because they are activity-based or period-based. Since they are closed and reopened, they are reporting on the activity for that specific period only. They are closed out annually.
Revenues, when they are closed, record all of a business's profits or earnings, which results in net income. Expenses, when closed, record all of a business's losses--all of those costs associated with operating the business--which contribute to a net loss. Now, a business can either be in a net income position--meaning revenues are greater than expenses--or in a net loss position, where expenses exceed the revenues.