Account Types (Assets, Liabilities, Income, Expenses, Equity)
Understanding account types is fundamental to proper accounting in EquiBillBook. Account types are the major categories that classify all your financial accounts. This guide explains each account type, their characteristics, and how they're used in your accounting system.
Overview of Account Types
In accounting, there are five main account types that form the foundation of the double-entry bookkeeping system. Every account in your Chart of Accounts belongs to one of these types:
- Assets - What your business owns
- Liabilities - What your business owes
- Income - Revenue your business earns
- Expenses - Costs your business incurs
- Equity - Owner's stake in the business
1. Assets
Assets represent what your business owns - resources that have economic value and can provide future benefits.
Characteristics
- Debit increases assets
- Credit decreases assets
- Normal balance is debit (positive balance)
- Appears on the Balance Sheet
Types of Assets
Current Assets
Assets that can be converted to cash within one year:
- Cash: Physical cash on hand
- Bank Accounts: Money in checking and savings accounts
- Accounts Receivable: Money owed to you by customers
- Inventory: Goods held for sale
- Prepaid Expenses: Expenses paid in advance
- Short-term Investments: Investments maturing within a year
Fixed Assets
Long-term assets used in business operations:
- Property, Plant & Equipment: Land, buildings, machinery
- Vehicles: Company cars, trucks, delivery vehicles
- Furniture & Fixtures: Office furniture, store fixtures
- Computer Equipment: Computers, servers, IT infrastructure
- Accumulated Depreciation: Reduction in asset value over time (contra-asset)
Other Assets
- Investments: Long-term investments
- Intangible Assets: Goodwill, patents, trademarks
- Loans Receivable: Money lent to others
Common Asset Accounts in EquiBillBook
- Cash Account
- Bank Account
- Sundry Debtors (Customer Receivables)
- Inventory Account
- Fixed Assets Accounts
2. Liabilities
Liabilities represent what your business owes to others - obligations that must be fulfilled in the future.
Characteristics
- Credit increases liabilities
- Debit decreases liabilities
- Normal balance is credit (positive balance)
- Appears on the Balance Sheet
Types of Liabilities
Current Liabilities
Obligations due within one year:
- Accounts Payable: Money owed to suppliers/vendors
- Short-term Loans: Loans due within a year
- Accrued Expenses: Expenses incurred but not yet paid
- Tax Payable: Taxes owed to government
- Credit Card Payable: Outstanding credit card balances
- Unearned Revenue: Payments received before delivering goods/services
Long-term Liabilities
Obligations due after one year:
- Long-term Loans: Bank loans, term loans
- Mortgages: Loans secured by property
- Bonds Payable: Corporate bonds issued
Common Liability Accounts in EquiBillBook
- Sundry Creditors (Supplier Payables)
- Loan Payable
- Tax Payable (GST, Income Tax)
- Credit Card Payable
3. Income
Income (also called Revenue) represents money earned from business operations - the inflow of economic benefits.
Characteristics
- Credit increases income
- Debit decreases income
- Normal balance is credit (positive balance)
- Appears on the Profit & Loss Statement
- Increases equity
Types of Income
Operating Income
Revenue from primary business activities:
- Sales Revenue: Income from selling products
- Service Revenue: Income from providing services
- Rental Income: Income from renting property
- Commission Income: Income from commissions
Other Income
Revenue from secondary activities:
- Interest Income: Interest earned on investments
- Dividend Income: Dividends received
- Gain on Sale: Profit from selling assets
- Discount Received: Discounts earned from suppliers
Common Income Accounts in EquiBillBook
- Sales Account (default account for sales invoices)
- Service Income
- Other Income
4. Expenses
Expenses represent costs incurred in running your business - the outflow of economic benefits.
Characteristics
- Debit increases expenses
- Credit decreases expenses
- Normal balance is debit (positive balance)
- Appears on the Profit & Loss Statement
- Decreases equity
Types of Expenses
Operating Expenses
Costs related to daily business operations:
- Cost of Goods Sold (COGS): Direct costs of producing goods
- Purchase Expenses: Costs of goods purchased for resale
- Salary & Wages: Employee compensation
- Rent: Office/store rent
- Utilities: Electricity, water, internet
- Marketing: Advertising, promotion costs
Administrative Expenses
General business expenses:
- Office Supplies: Stationery, office materials
- Professional Fees: Legal, accounting, consulting fees
- Insurance: Business insurance premiums
- Depreciation: Allocation of asset costs
- Bad Debts: Uncollectible receivables
Financial Expenses
- Interest Expense: Interest paid on loans
- Bank Charges: Banking fees and charges
- Discount Allowed: Discounts given to customers
Common Expense Accounts in EquiBillBook
- Purchase Account (default for purchase bills)
- Office Expenses
- Salary Expenses
- Rent Expenses
- Utilities
5. Equity
Equity represents the owner's stake in the business - the residual interest after liabilities are subtracted from assets.
Characteristics
- Credit increases equity
- Debit decreases equity
- Normal balance is credit (positive balance)
- Appears on the Balance Sheet
- Formula: Assets - Liabilities = Equity
Components of Equity
- Capital: Owner's initial investment
- Additional Paid-in Capital: Extra investment beyond initial capital
- Retained Earnings: Accumulated profits not distributed
- Current Year Profit/Loss: Net income/loss for the current period
- Drawings: Money withdrawn by owner (decreases equity)
Common Equity Accounts in EquiBillBook
- Capital Account
- Retained Earnings
- Drawings Account
Accounting Equation
These five account types are related by the fundamental accounting equation:
Assets = Liabilities + Equity
Or rearranged:
Equity = Assets - Liabilities
This equation must always balance, which is the foundation of double-entry bookkeeping.
Account Type Numbering System
In EquiBillBook, accounts are typically numbered by type:
- 1000-1999: Assets
- 2000-2999: Liabilities
- 3000-3999: Equity
- 4000-4999: Income
- 5000-5999: Expenses
This numbering helps organize accounts and makes them easier to find.
How Account Types Work in EquiBillBook
Automatic Account Assignment
EquiBillBook automatically assigns accounts based on transaction type:
- Sales invoices → Income account
- Purchase bills → Expense account
- Payments → Asset account (Bank/Cash)
- Customer receivables → Asset account
- Supplier payables → Liability account
Reports by Account Type
Financial reports organize accounts by type:
- Balance Sheet: Shows Assets, Liabilities, and Equity
- Profit & Loss: Shows Income and Expenses
- Trial Balance: Lists all accounts grouped by type
Creating Accounts by Type
When creating new accounts:
- Select the appropriate account type
- Choose or create a sub-type (if applicable)
- Enter account name and code
- Set opening balance (if needed)
- Activate the account
Best Practices
- Use standard account types as provided
- Maintain consistency in account classification
- Group similar accounts within the same type
- Follow accounting standards for account classification
- Review account types regularly to ensure proper categorization
Common Mistakes to Avoid
- Don't mix account types - keep them separate
- Avoid creating income accounts under expenses or vice versa
- Don't record assets as expenses or expenses as assets
- Ensure liability accounts are used for obligations, not expenses
Need Help?
If you're unsure about which account type to use:
- Review the default accounts created by EquiBillBook
- Check accounting standards for proper classification
- Consult with your accountant
- Refer to the Creating Accounts guides for step-by-step instructions
Understanding account types is essential for accurate accounting. Proper classification ensures your financial reports are correct and comply with accounting principles!