What are the 5 accounts in bookkeeping?
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The five core accounts in bookkeeping, often referred to as the "Five Major Account Types" or the Accounting Equation categories, form the fundamental structure of every balance sheet and income statement. Bookkeeping Services in Baltimore. Here are the five accounts:
1. Assets 💰
Assets are things a business owns that have a financial value. They represent future economic benefits to the company.
Examples: Cash, accounts receivable (money owed to the company by customers), inventory, equipment, buildings, and land. Normal Balance: Debit.
2. Liabilities 💳
Liabilities are what a business owes to outside parties. They represent an obligation to pay or provide service in the future.
Examples: Accounts payable (money the company owes to suppliers), salaries payable, short- and long-term loans, and unearned revenue (money received for services not yet delivered). Normal Balance: Credit.
3. Equity (or Owner's Equity/Stockholders' Equity) 💼
Equity represents the owners' stake in the company's assets—the residual interest in the assets after deducting liabilities. For corporations, this is called Stockholders' Equity.
Examples: Owner's capital, retained earnings (accumulated profits), and common stock. Normal Balance: Credit.
Note: The relationship between the first three accounts forms the fundamental accounting equation: $$\text{Assets} = \text{Liabilities} + \text{Equity}$$
4. Revenue (or Income) 📈
Revenue represents the money earned by a business from its normal activities, primarily through the sale of goods or services. It increases the overall equity of the business.
Examples: Sales, service revenue, interest income, and rent revenue.
Normal Balance: Credit.
5. Expenses (or Expenditure) 📉
Expenses are the costs incurred by a business to generate revenue. They represent a decrease in equity resulting from business operations.
Examples: Rent, utilities, salaries, cost of goods sold (COGS), advertising, and depreciation. Normal Balance: Debit.
Note: The difference between Revenue and Expenses determines the net income or loss for a period, which is then transferred to the Equity account.