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Types of Accounts

In financial accounting, every single transaction a business makes, from selling a product to paying a utility bill, must be recorded. To bring order to this vast amount of data, we use a classification system, or taxonomy.

Here are the ten types of accounts you'll encounter in journal entries:

  1. Asset
  2. Contra-Asset
  3. Liability
  4. Contra-Liability
  5. Equity
  6. Contra-Equity
  7. Revenue (or Income)
  8. Expense
  9. Gain
  10. Loss

When studying for the FAR section of the CPA Exam, it's crucial to understand where each line item in a journal entry fits within these account types.

Asset​

These are resources with economic value that a company owns or controls, expecting them to provide a future benefit.

  • Examples:
    • Cash: Money in bank accounts.
    • Accounts Receivable: Money owed to the company by its customers.
    • Equipment: Machinery, computers, and vehicles.
    • Inventory: Goods available for sale.
Debit
Credit
Cash
$1,000
Sales Revenue
$1,000

Contra-Asset​

This account has a credit balance (opposite of an asset) and is used to decrease the value of a related asset account.

  • Examples:
    • Accumulated Depreciation: The total amount of depreciation expense recorded for an asset (like Equipment) over its life.
    • Allowance for Doubtful Accounts: The estimated amount of Accounts Receivable that the company does not expect to collect.

Liability​

These are a company's obligations or debts—amounts owed to third parties.

  • Examples:
    • Accounts Payable: Money the company owes to its suppliers for goods or services.
    • Notes Payable: A formal written promise to pay a specific amount of money, usually with interest (like a bank loan).
    • Wages Payable: Salaries and wages owed to employees for work they have already performed.

Contra-Liability​

This is a less common account type. It has a debit balance (opposite of a liability) and reduces the value of a related liability.

  • Examples:
    • Discount on Bonds Payable: This account is used when a company issues a bond for less than its face value. It reduces the carrying value of the Bonds Payable liability on the balance sheet.
    • Discount on Notes Payable: Similar to a bond discount, this applies to a formal note.

Equity​

This represents the owners' residual claim on the company's assets after all liabilities have been paid. It's the "book value" of the company.

  • Examples:
    • Common Stock: The value of shares issued to the company's owners (stockholders).
    • Retained Earnings: The cumulative net income of the company that has been kept (retained) in the business rather than paid out as dividends.

Contra-Equity​

This account has a debit balance (opposite of equity) and reduces the total value of the owners' equity.

  • Examples:
    • Owner's Withdrawals (or Drawings): Money an owner of a sole proprietorship or partnership takes out of the business for personal use.
    • Treasury Stock: Shares of the company's own stock that it has repurchased from the open market.

Revenue (or Income)​

This is the income a company earns from its normal, primary business operations (like selling goods or services).

  • Examples:
    • Sales Revenue: Income from selling products.
    • Service Revenue: Income from performing services (e.g., consulting fees, repair fees).
    • Interest Income: Revenue earned from investments.

Expense​

This is the cost of operations that a company incurs to generate revenue.

  • Examples:
    • Salaries Expense: The cost of paying employees.
    • Rent Expense: The cost of using office or retail space.
    • Utilities Expense: The cost of electricity, water, and gas.
    • Cost of Goods Sold (COGS): The direct cost of the inventory that was sold.

Gain​

This is income from non-operating activities—events that are not part of the company's primary business.

  • Examples:
    • Gain on Sale of Asset: If a company sells a delivery van (Equipment) for 8,000,butitsbookvaluewasonly8,000, but its book value was only 6,000, it records a $2,000 gain.
    • Gain from Lawsuit: A one-time payment received from winning a lawsuit.

Loss​

This is a decrease in net income from non-operating activities.

  • Examples:
    • Loss on Sale of Asset: If a company sells that same van (book value 6,000)foronly6,000) for only 5,000, it records a $1,000 loss.
    • Loss from Lawsuit: A one-time payment made to settle a lawsuit.
    • Asset Impairment: A write-down in the value of an asset that has lost its economic usefulness.
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Understanding this account taxonomy is the single most important foundation for mastering accounting. Each category—from assets and liabilities to revenues, expenses, and equity—has a specific role and follows distinct rules for how it's increased or decreased. By mastering this classification, you move beyond simply memorizing journal entries and begin to understand the logical structure of the financial statements. This framework is the key that unlocks your ability to read, analyze, and confidently interpret any company's financial story.