Bookkeeping refers to the complete process of recording and tracking each of your business's financial transactions. Your company's accounting department or a third-party bookkeeper records your business activities according to your organization's accounting principles and supporting documents. While you can record your business transactions in an Excel spreadsheet or a notebook, tracking your organization's financial history will be much easier with bookkeeping software or help from an accounting professional. With an organized bookkeeping process, you can carefully monitor your business' financial capabilities and progress toward growth and increased profits.
There are different types of accounts used in bookkeeping services in Atlanta. With an organized bookkeeping process, you can carefully monitor your business' financial capabilities and progress toward growth and increased profits.
The five most common types of bookkeeping accounts
The five most popular types of accounts are:
- Asset accounts
- Liability accounts
- Equity accounts
- Revenue accounts
- Expense accounts
These five account categories can be again classified into:
- Real accounts
- Nominal accounts
Asset accounts
Assets are everything your business owns that has some value; they are worth something, benefiting you. Here are just some main ones:
- Cash: This is the most liquid asset, which also means it can be very quickly converted into cash like the positive balance in your bank account.
- Accounts Receivable: Money owed by the customers to your business.
- Inventory: Products or goods to be sold.
- Fixed Assets: Long-term tangible items like buildings and equipment.
Liability accounts
Liabilities, on the other hand, are what a business owes and is obligated to pay for. The examples include:
- Accounts payable: The money every business owes to the suppliers.
- Credit card debts: Any remaining credit card balances.
- Loans: Any money borrowed from the banks or other institutions.
- Overdrafts: Any remaining balance you owe to your bank.
Equity accounts
Equity is more complex. In short, it's your residual interest in all the assets of your business after deducting the liabilities. Think of it as what's left over for the business owner after the company has paid off all its debts (liabilities).
These equity accounts are:
- Retained earnings: The accumulated profit or loss results from each of the year you operate.
- Capital: Money you initially introduced to start your business or boost cash flow.
- Drawings: Business money you spent on personal expenses.
Revenue accounts
These showcase the income earnings your business earns from selling of the goods and services. They are usually divided into categories based on your business operations and include stock sales, consulting, and more.
Expense accounts
As you can imagine, these cover all the costs incurred doing business and generating income. This could include utilities, salaries, rent, marketing expenses, etc. Though these reduce your income, you get some relief because they are also used to minimize your income tax obligation. For this reason, they are also called the deductible expenses.
Real accounts
These are also called permanent accounts or balance sheet accounts in bookkeeping services in Atlanta. The real "permanent" accounts are the assets, liabilities, and equity. They are also known as "permanent" accounts because they are not closed at the conclusion of each accounting period, the same as nominal accounts are.
Instead, they maintain their balances from one to the next period, and their purpose is to provide a cumulative record of a business' financial position over time.
Their balances increase or decrease as appropriate in every financial year.
Real accounts provide:
- A long-term view of the business's financial position and
- Financial health is a snapshot of a particular date on the balance sheet.
Nominal accounts
These are also called temporary accounts or income statement accounts. The nominal "temporary" accounts are the revenue and expenses. They are called the "temporary" accounts because they are closed off at the conclusion of each financial year.
The purpose of the nominal accounts is to track the revenues, expenses, gains, and losses over a particular accounting period. These accounts help determine the company's net profit or loss for that period.
Closing Accounts: At the conclusion of an accounting period, the balances in these nominal accounts are then transferred to the balance sheet. This process is also known as "closing the books." This leaves a zero balance in each of the nominal account, ready to be filled up again in the next accounting year with financial transactions.
Nominal accounts are used for:
- Analyzing a business's performance over specific periods and for
- Preparing profit and loss reports.
In conclusion
There are five key account categories, all grouped on a chart. They are classified as permanent or temporary, which controls what report they go on. This structure keeps the revenue and expenses extremely well organized and easy to find.
Your knowledge of the diverse types of bookkeeping accounts will not only help you manage your finances with clarity. However, it will boost your confidence in conversations with the financial advisors and strengthen your analysis of your individual bookkeeping reports, enabling you to help your business thrive.
At Better Profits Bookkeeping, we can tackle your bookkeeping and take the task off your hands forever. Get in touch today!
