Lessons · Accounting · the five kinds of account
The five kinds of account
Every account is one of five: asset, liability, equity, revenue or expense. Revenue and expenses are equity's story told in detail for one year.
Hone is a place to practise a career, one idea a day. This is one of its lessons, written out in full and free to read without an account.
What it is for
Every piece of bookkeeping software asks for a type on every account, and the statements are built from those types. Put a loan repayment under expenses and the profit figure is wrong for the whole year.
How to think about it
Ask first: does it belong on the balance sheet (something we have, owe, or own) or on the income statement (something we earned or used up this period)? Then pick the type.
Worked example
Cash, accounts receivable, inventory, van → assetsThings we have.
Accounts payable, bank loan, wages owed → liabilitiesThings we owe.
Owner's capital, retained earnings → equityThe owner's stake.
Sales, interest earned → revenue; rent, wages, depreciation → expensesThis period's earning and using up. Revenue − expenses = profit, and profit joins equity.
Your turn
The electricity bill for the month is 240. Write its type: asset, liability, equity, revenue or expense.
Electricity, 240 →
Solve one, graded on the server
The trap
Calling a loan repayment an expense. Only the interest part is an expense; the rest reduces a liability, and the business is no poorer for paying it.