An account is a record that provides information about a given asset, liability, equity, revenue, or expense. All accounts organize into what is called a chart of accounts, which details all of the accounts contained within a company's financial system.
There are two main types of accounts, which we will cover in more detail in the next sections:
As you can see, the chart outlines the asset accounts: cash, current assets, and fixed assets. It also details the liabilities, which are the equity, revenue, and expenses. It is numerically ordered in a manner that allows a company to easily pinpoint specific accounts within a category of accounts.
Let's dive a bit deeper into the two main type of accounts, beginning with permanent accounts. Permanent accounts are accounts whose balances carry over from one accounting period to the next accounting period. There are three categories within this permanent account classification:
Assets are physical or non-physical resources owned by an organization that have economic value--resources like cash, inventory, and equipment.
Liabilities are the debts and other financial responsibilities of an organization, like accounts payable and loans payable, if money is owed to the bank, for instance.
The last category, equity, is the remaining value, once liabilities are subtracted from assets; think of this as the owner's capital accounts, retained earnings, or owner's draw.
The other main type of account are temporary accounts, which are accounts whose balances are closed at the end of an accounting period, and reopened at the beginning of the next period.
There are two types of temporary accounts
Now, why do we consider these accounts temporary? It's because they are activity-based or period-based. Since they are closed and reopened, they are reporting on the activity for that specific period only. They are closed out annually.
Revenues, when they are closed, record all of a business's profits or earnings, which results in net income. Expenses, when closed, record all of a business's losses--all of those costs associated with operating the business--which contribute to a net loss. Now, a business can either be in a net income position--meaning revenues are greater than expenses--or in a net loss position, where expenses exceed the revenues.
Source: Adapted from Sophia instructor Evan McLaughlin.