Ever wondered where your money is going? Every business transaction falls into one of five major accounts - assets, liabilities, equity, revenue, or expenses. Understanding them is the key to accurate bookkeeping. Here’s how they work, with real examples.
Key Takeaways
Every business transaction falls into one of the five major accounts: assets, liabilities, equity, revenue, or expenses.
Assets are what a business owns, while liabilities are what it owes.
Equity represents the owner's stake in the business after liabilities are deducted.
Revenue is the income a business earns, and expenses are the costs of running the business.
Assets
Assets are anything a business owns that has value and helps in its operations. They can include cash, accounts receivable, inventory, equipment, and property.
Assets are recorded on the balance sheet and are essential for generating revenue and maintaining financial stability.
RECOMMENDED READING: Basic Bookkeeping Terms (and Definitions) You Must Know
Example
A retail store's assets may include cash in the register, unsold inventory, store furniture, and company-owned delivery vehicles. These assets help the business operate efficiently and generate income.
Liabilities
Liabilities are debts or obligations a business owes to others. They include money owed to suppliers, loans, and wages payable. Liabilities are recorded on the balance sheet and must be paid off over time. Managing them well helps keep a business financially stable.
Example
If a business buys supplies on credit, the amount owed to the supplier is a liability until it is paid. Similarly, a business loan is a liability that must be repaid with interest.
Equity
In accounting, equity represents the owner's share of the business after all debts have been paid. It's calculated by subtracting total liabilities from total assets. Equity is recorded on the balance sheet and indicates the net value or worth of the business.
Example
If a company has assets totalling £500,000 and liabilities amounting to £200,000, the equity would be £300,000. This means the owners have a £300,000 stake in the company's net assets.
Revenue
Revenue refers to the total income a business earns from its primary operations, such as selling products or providing services. It's often called the "top line" because it appears at the top of the income statement.
Example
If a bakery sells 100 cakes for £10 each, its total revenue is £1,000. This is the income earned from sales before deducting any expenses like ingredients or rent.
Expenses
Expenses are the costs a business pays to keep running. These include rent, salaries, utilities, office supplies, and marketing. Expenses reduce the company’s profit and are recorded on the income statement. Managing expenses well helps keep a business financially healthy.
Example
If a business pays £2,000 in rent and £1,000 for employee salaries in a month, these are recorded as expenses that reduce the company’s income.
What We Think
Understanding the five major accounts in bookkeeping (assets, liabilities, equity, revenue, and expenses) is essential for keeping business finances organised. Yet, many small business owners and freelancers struggle with categorising transactions correctly, which can lead to inaccurate financial records and tax issues.
A common issue is mixing up assets and expenses - for example, recording business equipment as an expense instead of an asset. Not tracking liabilities properly, like loans or unpaid bills, can also cause cash flow problems.
How JAFA Can Help
Keeping track of bookkeeping accounts can be overwhelming, but JAFA simplifies the process by using AI technology for bookkeeping. Instead of manually categorising transactions or worrying about errors, JAFA automates record-keeping, ensuring accuracy and compliance.
With real-time insights, small business owners and freelancers can easily monitor the five types of accounts in accounting, assets, liabilities, revenue, equity, and expenses, helping them stay on top of their finances. JAFA’s automated bookkeeping eliminates guesswork, which makes sure that transactions are correctly recorded and categorised.
Contact our expert accountants in Birmingham, UK, by booking a FREE discovery call or calling us at +44 121 227 6277 to keep your small business finances in check.
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