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There are five essential accounts that help organize your small business accounting process.
Excelling at small business accounting begins with keeping accurate books. A critical factor in bookkeeping is knowing the types of accounts. These accounts help you sort and track transactions in your business. Even if a business has many accounts in their books, they all fall under one of these five categories: assets, expenses, liabilities, equity, and income, or revenue. Read our guide to the accounts essential for small business accounting and how they can indicate your business’ growth.
How Debits and Credits Affect Your Small Business Accounting
When you make purchases or sales, record the transaction in the proper account. This will enable you to see whether an account is increasing or decreasing. Debit and credit transactions will increase or decrease specific accounts in the following pattern:
Increased by Debit and Decreased by Credit
Asset and Expense accounts are affected by transactions in this way.
Increased by Credit and Decreased by Debit
Liability, Equity, and Revenue accounts are affected by transactions in this form.
The Benefits of Sub-Accounts
Rather than only using these five accounts in your small business accounting plan, businesses often break down their accounts even further into sub-accounts. Using sub-accounts allows you to know exactly where funds are coming from.
Asset Accounts
Assets are the physical or non-physical property that adds value to your business. For example, a computer, a business car, and trademarks. The sub-accounts for assets include:
- Checking
- Petty Cash
- Inventory
- Accounts Receivable
Expense Accounts
Expenses are costs that your business incurs during operations. Buying office supplies is considered an expense in small business accounting because you need these items to operate your business. The sub-accounts for expense accounts include:
- Payroll
- Insurance
- Rent
- Equipment
- Cost of Goods Sold (COGS)
Liability Accounts
Liabilities are amounts that your business owes, or expenses you may have incurred but have not paid yet. Business accounts that are included underneath liability accounts include:
- Payroll Tax Liabilities
- Sales Tax Collected
- Credit Memo Liability
- Accounts Payable
Equity Accounts
Equity is the difference between your assets and liabilities, and it shows you how much your business is worth. Equity sub-accounts include:
- Owner’s Equity
- Common Stock
- Retained Earnings
Income Accounts
Income, also known as revenue, is money your business earns. Your income accounts track incoming money from operations and non-operations. Sub-accounts underneath income accounts include:
- Product Sales
- Earned Interest
- Miscellaneous Income
How to Use Accounts in Small Business Accounting
The types of accounts your business uses depend on the small business accounting method you select for your business. You can choose between cash-basis, modified cash-basis, and accrual accounting. Businesses generally list their accounts in a chart of accounts (COA) to organize account types, numbers, and to easily locate transaction information.
Cash-Basis Accounting
This accounting method will not need to use liability accounts payable.
Modified Cash-Basis and Accrual Basis
These two types of accounting will require the use of all five core accounts.
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