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Account Groups

Account Groups

Author: Sophia Tutorial
Description:

Compare the types of permanent accounts with the types of temporary accounts.

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Tutorial
what's covered
This tutorial will cover the topic of account groups, discussing the different types of accounts and how they are used.

Our discussion breaks down as follows:

  1. Types Of Accounts
    1. Chart of Accounts
  2. Permanent Accounts
  3. Temporary Accounts


1. Types of Accounts

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:

  1. Permanent accounts, which are a company's assets, liabilities, and equity.
  2. Temporary accounts, which are a company's revenue and expenses.
term to know
Account
A record that provides information about a given asset, liability, equity, revenue or expense

1a. Chart of Accounts
As mentioned above, a chart of accounts is a detail of all the accounts contained within a company's financial system. It is organized by account type and categories, as shown in the example below:

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.


2. Permanent 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
  • Liabilities
  • Equity

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.

terms to know
Permanent Accounts
Accounts whose balances carry over from one accounting period to the next accounting period
Assets
Physical or non-physical resources owned by an organization that have economic value
Liabilities
Debts and other financial responsibilities of an organization
Equity
The remaining value once liabilities are subtracted from assets


3. Temporary Accounts

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

  • Revenues, which are earnings from interest, or from the sale of goods or services.
  • Expenses, which are costs associated with operating or maintaining a business.

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.

terms to know
Temporary Accounts
Accounts whose balances are closed at the end of an accounting period and reopened at the beginning of the next period
Revenue
Earnings from interest or from the sale of goods or services
Expenses
Costs associated with operating or maintaining a business


summary
Today we learned about the two main types of accounts: permanent accounts and temporary accounts. Permanent accounts track three categories: liabilities, equity, and assets. Temporary accounts track two categories: revenues and expenses. All of these accounts can be organized within a chart of accounts, which is a detail of all the accounts contained within a company's financial system.

Source: Adapted from Sophia instructor Evan McLaughlin.

Terms to Know
Account

A record that provides information about a given asset, liability, equity, revenue or expense.

Assets

Physical or non-physical resources owned by an organization that have economic value.

Equity

The remaining value once liabilities are subtracted from assets.

Expenses

Costs associated with operating or maintaining a business.

Liabilities

Debts and other financial responsibilities of an organization.

Permanent Accounts

Accounts whose balances carry over from one accounting period to the next accounting period.

Revenue

Earnings from interest or from the sale of goods or services.

Temporary Accounts

Accounts whose balances are closed at the end of an accounting period and reopened at the beginning of the next period.