Bookkeeping Basic: Understanding Account Types
Understanding the difference between account types is the secret to coding transactions correctly. Here’s the cheat’s guide to understanding the difference between assets and liabilities, equity and income, bananas and apples.
Current asset: Anything that a business owns that can realistically be converted into cash within the next 12 months.
Non-current asset:A physical asset such as office equipment, land, buildings, computers or motor vehicles, that isn’t expected to be converted into cash within the next 12 months.
Current liability:An amount owed by the business that is due within the next 12 months, including scary stuff such as credit cards.
Non-current liability: Anything you owe that isn’t due to be paid out within the next 12 months, such as hire purchase debts or bank loans.
Equity:The ‘interest’ that shareholders or an owner has in the business, including both capital contributed and the profit or loss built up over time.
Income:Money generated from sales to customers or returns on investments.
Cost of sales:What it costs in raw materials, supplies or production labour to make the goods that you sell (also called cost of goods sold or variable expenses).
Expenses:The day-to-day running costs of your business, including things like advertising, bank charges, computer consumables, diamond rings, electricity, motor vehicle expenses, rent, telephone expenses and wages. (Just kidding about the diamonds.) Expenses are sometimes also called fixed expenses or overheads.