Accounting is the language of business, and at the heart of it lie five fundamental types of accounts. Each of these accounts plays a unique role in tracking business transactions, ensuring financial accuracy, and supporting strategic decisions.
Let’s break them down with definitions and relatable examples.
1. 💰 Assets Account
What Are Assets?
Assets are resources owned by a business that provide economic value. These could be tangible, like machinery, or intangible, like copyrights.
Examples of Asset Accounts:
- Cash
- Accounts Receivable
- Equipment
- Land
- Inventory
- Buildings
🧾 Real-Life Transaction Example:
Transaction: A company purchases office furniture worth $5,000 in cash.
- Journal Entry:
- Debit Furniture (Asset) $5,000
- Credit Cash (Asset) $5,000
Both are assets, but furniture increases and cash decreases.
2. 📑 Liabilities Account
What Are Liabilities?
Liabilities are obligations or debts the company owes to outsiders. These often result from borrowing money, purchasing on credit, or unpaid bills.
Examples of Liability Accounts:
- Accounts Payable
- Loans Payable
- Salaries Payable
- Interest Payable
- Taxes Payable
🧾 Real-Life Transaction Example:
Transaction: A business takes a bank loan of $10,000.
- Journal Entry:
- Debit Cash (Asset) $10,000
- Credit Bank Loan (Liability) $10,000
The company receives cash, but it now owes that amount to the bank.
3. 👤 Owner’s Equity (Capital) Account
What Is Owner’s Equity?
Owner’s equity (or shareholder’s equity for corporations) represents the owner’s claim after liabilities are deducted from assets. It includes the original investment plus retained earnings.
Examples of Equity Accounts:
- Capital
- Drawing (Contra Equity)
- Retained Earnings
- Common Stock (for corporations)
🧾 Real-Life Transaction Example:
Transaction: The owner invests $20,000 cash to start the business.
- Journal Entry:
- Debit Cash (Asset) $20,000
- Credit Owner’s Capital (Equity) $20,000
This transaction reflects the owner’s claim on the company through their investment.
4. 💵 Revenue (Income) Account
What Is Revenue?
Revenue is the income earned from normal business activities, such as sales of products or services.
Examples of Revenue Accounts:
- Sales Revenue
- Service Revenue
- Rent Income
- Interest Income
- Commission Income
🧾 Real-Life Transaction Example:
Transaction: A customer purchases goods worth $3,000 on credit.
- Journal Entry:
- Debit Accounts Receivable (Asset) $3,000
- Credit Sales Revenue $3,000
The company earned revenue, and the customer owes money, increasing both assets and income.
5. 💸 Expenses Account
What Are Expenses?
Expenses are costs incurred to earn revenue. These accounts reduce net income and equity.
Examples of Expense Accounts:
- Rent Expense
- Salaries and Wages
- Utility Bills
- Marketing Expense
- Depreciation Expense
🧾 Real-Life Transaction Example:
Transaction: Paid $2,000 in monthly office rent.
- Journal Entry:
- Debit Rent Expense $2,000
- Credit Cash (Asset) $2,000
The rent expense reduces profit and decreases cash.
📊 Summary Table – 5 Major Account Types
| Type of Account | What It Tracks | Example Accounts | Real-World Example |
|---|---|---|---|
| Assets | What the business owns | Cash, Equipment, Inventory | Buying office furniture |
| Liabilities | What the business owes | Loans, Accounts Payable | Taking a bank loan |
| Equity | Owner’s investment and earnings | Capital, Retained Earnings | Owner starts the business with $20,000 |
| Revenue | Income from business operations | Sales, Service Income | Selling a product |
| Expenses | Costs to earn revenue | Rent, Salaries, Utilities | Paying office rent |
🔚 Final Thoughts: Why These Accounts Matter
Each of these five accounts plays a fundamental role in bookkeeping and financial analysis. By categorizing transactions into assets, liabilities, equity, revenue, and expenses, businesses gain clear insights into performance, cash flow, and profitability.
Whether you’re starting a small business or studying accounting, mastering these five pillars of accounting is the first step toward financial literacy.
❓ FAQ – 5 Major Types of Accounts
Q1: Which type of account is equipment?
A: Equipment is an asset because it provides long-term value to the business.
Q2: Is salary an expense or liability?
A: Salary is an expense when paid and a liability if unpaid at the end of the period.
Q3: What increases owner’s equity?
A: Profits and additional owner investments increase equity.
Q4: Is revenue always cash?
A: No. Revenue can be earned on credit as well (Accounts Receivable).
Q5: How do expenses affect equity?
A: Expenses reduce net income, which in turn reduces equity.
