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15 Types of Accounting to Know in 2022

There are five different types of accounts in accounting that provide a structure to the chart of accounts, namely assets, expenses, liabilities, equity, and revenue. Given that their role is to define your business’s channels for spending or receiving money, each account category can be further broken down into several subcategories. It’s also important to note that the five major accounts are interrelated. Therefore, a change in one account triggers a chain reaction, making the other accounts change as well.

  1. In accounting, details are everything, so be sure to make a note of these if you’re planning on doing your own accounting and bookkeeping.
  2. The work performed by accountants is at the heart of modern financial markets.
  3. In the United States, generally accepted accounting principles (GAAP) are regulated by the Financial Accounting Standards Board (FASB).
  4. Because important tax and legal issues may be involved, we suggest consulting a tax or legal adviser before opening this type of account to determine what would be best for your individual situation.
  5. Consider the example of an employee whose wages are paid in advance to him/her, a prepaid wages account will be opened in the books of accounts.

Regardless of who you hire, knowing basic accounting principles can help you understand your business better and have more productive conversations with your financial team. After you enter a transaction and categorize it under an account, your accounting software will create a journal entry behind the scenes. Most modern accounting software uses the double-entry accounting types of accounts in accounting system, which requires two book entries — one debit and one credit — for every business transaction. Some of the components of the owner’s equity accounts include common stock, preferred stock, and retained earnings. The numbering system of the owner’s equity account for a large company can continue from the liability accounts and start from 3000 to 3999.

Financial accounting focuses on keeping track of all financial transactions and preparing financial statements. One of the most apparent advantages of a chart of accounts is that it can give you an excellent insight into your company’s revenue. Each time you buy or sell a product or a service, you are required to record the transaction in the corresponding account.

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Types of Accounts

Simply put, a chart of accounts (or COA) is an organizational tool that provides financial oversight of all of a business’s transactions and accounts. In most cases, accountants use generally accepted accounting principles (GAAP) when preparing financial statements in the U.S. GAAP is a set of standards and principles designed to improve the comparability and consistency of financial reporting across industries.

When were accounting principles first set forth?

On the other hand, asset accounts keep track of items and other things of value—from credits owed to you to the funds in your bank account—that can provide economic gains for your company. Accounting software normally lists the accounts in a COA (Chart of Accounts). A COA is where you organize the various accounts used in your business. Only when accounts are set up in the COA can they be selected and used to track specific transactions or financial events in accounting systems. While a specific certification in accounting information systems does not yet exist, you can pursue various certifications that focus on different aspects of accounting and information systems. Software vendors, such as Microsoft and Oracle, also offer various certifications focusing on their respective accounting software products.

Accounting history dates back to ancient civilizations in Mesopotamia, Egypt, and Babylon. For example, during the Roman Empire, the government had detailed records of its finances. However, modern accounting as a profession has only been around since the early 19th century. You can set up sub-accounts for insurance (e.g., general liability insurance, errors and omissions insurance, etc.) to further break things down.

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These platforms can also integrate with other departments, like payroll and inventory management systems, to reduce manual data entry. In this post, we’ll go over the different accounting types to help you understand which types of accountants your business might need. Below is an example of a chart of accounts https://personal-accounting.org/ for Metro Courier, Inc. which is a corporation. Notice how the chart is listed in the order of Assets, Liabilities, Equity, Revenue and Expense. According to the rules of accounting, you increase your revenue account by crediting it. In the same vein, by debiting revenue accounts, you’ll decrease them.

Financial accounting mainly tracks and reports transactions through financial statements. Numerous types of accounting range from the preparation of tax returns to auditing. In addition, there are different business sectors in the market, so there are different methods to evaluate them according to their needs. Accrual accounting is based on the matching principle, which is intended to match the timing of revenue and expense recognition. By matching revenues with expenses, the accrual method gives a more accurate picture of a company's true financial condition.

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An added bonus of keeping a neat and accurate chart of accounts is that it’ll make your life much simpler come tax season. This listing tracks your company’s income and expenses, which are precisely the items you’re required to report on your income tax return each year. When setting up a chart of accounts, typically, the accounts that are listed will depend on the nature of the business. For example, a taxi business will include certain accounts that are specific to the taxi business, in addition to the general accounts that are common to all businesses. It may be handled by a bookkeeper or an accountant at a small firm, or by sizable finance departments with dozens of employees at larger companies. The reports generated by various streams of accounting, such as cost accounting and managerial accounting, are invaluable in helping management make informed business decisions.

Liabilities, equity, and revenue increase when you credit the accounts and decrease when you debit them. Generally, businesses list their accounts by creating a chart of accounts (COA). A chart of accounts lets you organize your account types, number each account, and easily locate transaction information. Due to the fact that both internal and external users of accounting information rely on financial data, the accounts identified and the resulting rules applied should be accurate at all times.

Among the reasons you may choose to work in tax accounting are the various tax laws. Every year, the IRS updates the tax code, which provides new challenges for tax accountants. You must stay up-to-date on the latest changes to prepare your clients' taxes properly. Additionally, tax accountants must be able to navigate the complex web of tax laws to find the best way to minimize their clients' taxes and provide tax advice. Seeing your clients save money on their taxes can also be gratifying.

In cash accounting, transactions are only recorded when cash is spent or received. The two main types of financial accounting are cash accounting and accrual accounting. Financial accounting is probably the most common context for internal audits. In some cases, if the company’s leadership suspects financial wrongdoing, they might bring in a forensic accountant for an internal audit. We recommend regular internal audits to ensure your company’s finances are in order.

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