By Emma Shean | Full Article | 2000 words | Apr 7, 2011
4 minute read
All accounts fit into 5 overarching account types: assets, liabilities,
equity, expenses, and Income.
They are important so that you understand why an account fits into one of the
5 overarching categories.
If you read 2 different accounting books, they will both agree on the 5
overarching accounts. However, you will get some different, but similar,
underling account types.
An asset is basically something that a company owns and uses for the benefit
of the company. Think of an asset as something of value that the company owns.
The following are asset underling account types:
Bank Accounts – If I need to explain to you why they are valuable, then you
need to stop reading this.
Accounts Receivable (A/R) – This is an account to track money that is owed
to you. A/R is different than a loan you make to someone (which is a note
receivable… also an asset.) Once you sell a good or service, you are owed
money. Accounting considers the money you are owed to be as good as
collected. So, A/R is an asset that you hold… It’s the future collection of
money… A/R is kind of like a trust fund that you don’t have access to yet.
Fixed Asset – A fixed asset is something of value that you will have for a
long time, typically over a year. This includes your property, equipment,
furniture, etc… Fixed assets are usually depreciable, which sucks… because I
hate explaining depreciation.
Current Asset – Current assets are assets that will be converted to cash
quickly, usually within a year. This includes inventory, prepaid expenses
(hold on, I’ll talk about that in a sec), undeposited funds (money you
collected, but haven’t deposited yet), etc…
A liability is money that you owe… basic. The following are liability
underling account types:
Accounts Payable (A/P) – This is an account to track money that you owe. Yes, that is the same definition I gave you for all liabilities… think of A/P as an account to track any bill you receive. A/P is different than your mortgage (which is a long term liability.) When you receive a good or service, you owe money. Accounting considers the money you owe to be as good as paid.
Let’s you receive an electricity bill, but haven’t paid it yet. That bill represents an A/P liability because you owe that money.
Liability (Current Liability) – Current liabilities are liabilities that will
typically be paid within one year. I say “Typically” very loosely. Since this
is property management accounting, if the account isn’t an A/P account and it
isn’t a mortgage/loan, it’s a current liability. So, here’s some examples:
accrued property tax (you owe property tax every month, but are only billed
twice a year… so you can track the liability each month if you’re an
accounting superstar… I am not an accounting superstar.), tenant prepaid rent,
security deposits, etc…
Almost no accounting program handles these correctly. When I test other
property management software programs to see what they are doing, this is the
biggest part that gets me so frustrated with them… I should be happy that they
do it wrong, but I get so unbelievably frustrated… and I’m not even using
their software to do any actual management!
Long Term Liability – Basically, your mortgage… moving on…
EQUITY (OWNERS’ EQUITY)–
Not gonna lie, this isn’t an easy one. Luckily, if you’re doing basic
bookkeeping, you won’t really have to deal with this. Equity accounts track
the value of the portion of the company that is owned by one or more people.
If a company has more than one owner, each owner may be tracked in their own
individual account. That takes a lot of work and I let my accountant do
that… I just track all owners in 1 equity account.
Here’s an easy way to understand an equity account: Let’s say you wake-up in
the morning and want to know the value of your Microsoft stock. You grab the
newspaper, pour some Folgers in your cup, and look at the stock value (this
example takes place in 1990.) The value of your stock is basically the same
as looking at your equity account for Microsoft.
Expense – This is an easy one. If you are paying money and you are not paying
down a liability (security deposit, mortgage, etc…), the money you are paying
is an expense… pretty much, all of your bills use an expense account.
Income – This one isn’t bad either. If you are charging a tenant for a
good/service, the charge is income. One thing I’ll clear up later, in an
example, is how to do the bookkeeping when you keep or make a withholding
against a security deposit. The deposit you are keeping is actually income,
even if it is used to pay for an expense… don’t worry, the expense you’re
concerned about offsets the income and they cancel each other out, so you’re
not actually paying taxes on that security deposit income.