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7 Min. Read

5 Different Types of Accounts in Accounting

5 Different Types of Accounts in Accounting

Did you know that there is more than one type of account in accounting? You’re probably plenty familiar with credits and debits. They serve to cause accounts to increase and decrease. But there are other accounts that credits and debits can affect, as well.

Those accounts are precisely what we want to focus on today. So join us as we share the five different account types that you need to know about as a small business owner in Canada.

Here’s What We’ll Cover:

Accounts in Accounting?

The 5 Account Types

Accounts and Sub-Accounts

Asset Sub-Accounts

Liability Sub-Accounts

Expense Sub-Accounts

Income Sub-Accounts

Equity Sub-Accounts

Key Takeaways

Accounts in Accounting?

Any time you sell a product or service, your accounting books need to be updated to reflect each transaction. When this is done, the proper transaction gets placed in its corresponding account. And when your business purchases products or services from other companies, you need to make a note of such transactions, as well.

It’s this ongoing log of records that keeps your business operating at a high level. You will know how much working capital you have, as your financial statements will be accurate. Each account should therefore reflect the correct amounts, letting you see what each one holds.

Most businesses list their accounts in a COA (Chart of Accounts). A COA is a place where you organize your various accounts used in your business. When you have this critical account information all in one place, it’s easy to track down specific transactions when you need them.

But a COA that’s in disarray — or no COA at all — can quickly lead to inaccuracies that harm your operations and financial strength. So let’s explore the different types of accounts in accounting. And in doing so, you will know which ones to use in your business for effective bookkeeping.

The 5 Account Types

We should preface this headline by saying that there can be a seemingly endless number of account types among businesses. And while that’s true, all of those accounts fall under one of five account categories. This makes it easier to compile the other account types for systematic review and retrieval.

The five primary account categories are as follows:

  • Assets
  • Liabilities
  • Expenses
  • Income (Revenue)
  • Equity

Once you understand how debits and credits affect the above accounts, it will be easier to determine where to place your sub-accounts. It’s important to get familiar with how debits and credits affect each account type.

So let’s explore that now and see what kind of impact they have. Below is a handy chart explaining the effects that debits and credits have on each of the five primary account types.

Account Type

Debit Effect

Credit Effect

Assets

Increased

Decreased

Liabilities

Decreased

Increased

Expenses

Increased

Decreased

Income

Decreased

Increased

Equity

Decreased

Increased

Try to memorize this chart so that you don’t struggle to properly categorize your sub-accounts.

Accounts and Sub-Accounts

If you’ve been a business owner for any length of time, you’ve probably seen a wide variety of different account types. Known as sub-accounts, these account types can vary wildly. What’s more, they are often customized to fit the specific needs of the business owner.

With that said, there are some mainstays that are universal and used by the vast majority of businesses. Some examples include petty cash accounts or checking accounts. Why would you want to use these kinds of sub-accounts?

Simply put, they help you break down accounts into easily managed categories. So rather than list every transaction using only the five primary account types, you would use sub-accounts to simplify things.

Plus, you can easily track down a specific purchase or sale by locating the most applicable sub-account. This is a much faster method compared to scrolling through numerous transactions using only the real accounts.

Moreover, every sub-account that you use allows you to keep track of your spending more accurately. When combined with accounting software like FreshBooks, managing your assets is easier than ever. And you can trust that it’s more accurate than trying to juggle your transactions across a limited landscape.

Let’s take a look at some of the most common sub-account types used by businesses in various industries. Keep in mind that these sub-accounts go into one of the five real accounts (Assets, Liabilities, Expenses, Income, and Equity).

We’ll start with Assets and work our way down the list.

Asset Sub-Accounts

Your business’s assets are anything that adds value to your brand. They could be things like raw materials or company vehicles. And since assets can be tangible and intangible, your business’s assets can also include company trademarks.

Here are some common sub-accounts for Asset accounts:

  • Accounts Receivable
  • Petty Cash
  • Inventory
  • Checking

Some people get confused when they see Accounts Receivable since you don’t physically have that money on hand. But because that money is still owed to you, it counts toward your assets. Remember, under the Assets category, credits decrease while debits increase.

Liability Sub-Accounts

Liabilities are anything your company owes out. For example, let’s say you needed machinery serviced or repaired. It was a fairly pricey fix, so the repair company just gave you an invoice. You haven’t yet paid for the service, but you owe it. That’s a liability.

Here are some common sub-accounts for Liability accounts:

  • Collected Sales Tax
  • Accounts Payable
  • Credit Memo
  • Income Tax
  • Payroll Tax

Accounts Payable consists of items you still have yet to pay. Therefore, you would put related sub-categories under the Liabilities umbrella.

Expense Sub-Accounts

Your company’s expenses are anything you purchase to go toward running your business. When you buy fuel for your company vehicle or stock up on office supplies, those purchases are considered company expenses.

Here are some common sub-accounts for Expense accounts:

  • COGS (Cost of Goods Sold)
  • Equipment
  • Insurance
  • Payroll
  • Rent

Here, your Expense accounts are increased by things like debit cards but decreased by credit cards. So any time your business spends money, your expenses account increases.

Income Sub-Accounts

Also known as Revenue accounts, Income is any money that your company earns. Moreover, anything that brings in money for any reason is tracked under Revenue accounts.

Here are some common sub-accounts for Revenue accounts:

  • Earned Interest
  • Product Sales
  • Income

Credit transactions in sub-accounts increase your company’s Revenue accounts. But debit expenses decrease Revenue accounts. To ensure optimal income, strive for credits over debits.

Equity Sub-Accounts

Equity refers to your company’s overall worth. What’s more, it’s the difference between liabilities and assets.

Here are some common sub-accounts for Equity accounts:

  • Retained Earnings
  • Owner’s Equity
  • Stock

Your company’s Equities account increases with things like credit cards but decreases with debit cards.

Key Takeaways

Now that you know how accounts and sub-accounts work, you can make the necessary adjustments in your company. In doing so, you can effectively reduce unnecessary spending, increase revenue, and meet financial goals.

Care for additional tips on small businesses? Check out our Resource Hub and get updates on all the latest trends and insights. And don’t forget to try out FreshBooks business accounting software. From sole proprietorships to LLPs, FreshBooks will help you strengthen your financial situation. It’s like having your own personal financial advisor but at a fraction of the cost!


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