Broadly, there are three types of accounts where accounting transactions are posted. These accounts include assets, liabilities, and equity.

Assets in the financial statement

Assets are economic resources controlled by an entity. They are valuable items with current and future economic value. Depending on their nature and use, assets may or may not generate cash today.  

Further assets can be non-current or current.

Non-current assets—These are the assets controlled and expected to be retained for more than one accounting year. Examples of non-current assets include property, plant, and equipment, long-term advances, and long-term investments etc.

Property, plant, and equipment—This account contains the net book value of the total assets controlled by the entity. Net book value is reached by deducting accumulated depreciation from total fixed assets. In addition to fixed assets listed in the accounting ledger, the fixed assets register is maintained, containing details of fixed assets, including depreciation, accumulated depreciation, disposal details, etc.

Long-term deposit—This account contains a listing of the deposits made by the business. The total for the listing is shown in the business balance sheet.

Long-term investment—This account enlists all types of investments the business intends to hold for more than one year. The profit earned on these investments is added to the profit and loss statement.

Current assets

These assets can be expected to be sold/consumed within one accounting year. For instance, accounts receivable, short-term deposits, short-term investments, and inventory are current assets.

Account receivable—It’s the outstanding balance the business needs to collect from its customers. At the end of the accounting period, the balance is reviewed in terms of collection, and a provision is provided, or the amount is written off.

Short-term investment—This is an investment made by a business for less than one year. The business intends to sell the investment and realize profit. For instance, term deposits, mutual funds, and other liquid funds are classified in this account.

Prepaid assets—This account enlists transactions containing cash payments made before receiving services. The balance is adjusted in line with the services consumed.

Inventory—This account balance reflects inventory movement in terms of opening, addition, deletion, and closing. In line with accounting standards, the inventory valuation is lower in cost and NRV.

Cash & bank balance– This account contains transactions related to cash movement. The ending balance of the cash account is reconciled with the bank statement after adjusting for the uncredited checks, unpresented checks, bank charges, etc.

Equity account

The balance in this account reflects ownership interest. This balance is calculated by deducting total liabilities from total liabilities. It’s a residual amount after paying liabilities using business assets.

Equity accounts contain balances related to the following.

Share capital– Total equity/finance the owner raises is classified in the share capital account.

Retained earnings– This is the profit/earnings the business retains in its operations/financing structure. The current amount for profit/loss is adjusted in the retained earning account. For instance, the current year’s profit increases retained earnings; the reverse is true for the loss.

Liability account

Liability is a present obligation on the business that needs to be settled. There are two types of liabilities: current and non-current liability.

Current Liability   

It’s a present obligation the business needs to settle within one accounting year. This balance can be -the current portion of the long-term loan. The examples of items in the current liability account include the following.

Accounts payable– This balance reflects the account balance payable to the vendors. It lists the purchase invoices generated from vendors that need to be paid.

The business incurs accrued expenses, but the total amount payable is uncertain. It’s an estimated bill/liability for which services were already utilized, but the total amount remains uncertain. For instance, utility bills, accrued wages etc.   

Short-term borrowings– It’s the short-term loan raised by a business. The business must pay this balance within one accounting year. Some examples of short-term borrowings include overdraft facilities, the current portion of long-term loans, and other short-term contracts.

Non current liability

Non current liability is present obligation that needs to be paid after 12 months. The examples of non current liability include long term loan and borrowings.

Sales account

The sales account enlists all transactions during the accounting period. It contains cash and credit sales, sales returns, and trade discounts where applicable. Multiple sources of income can be listed in the sales sub-account.

The sources of income vary depending on the business’s nature. For instance, service income or product income can be sources of income.

Expense account

An expense account enlists all the transactions related to expenses. There can be different types of expense accounts, such as cost of sales, administrative expenses, finance expenses, and market expenses etc.

It’s important to note that the above list is not exhaustive, and different accounts can exist depending on the business nature.

Conclusion

Broadly, the financial accounting and reporting process has three types of accounts. These accounts include assets, liabilities, and equity.

An asset is a resource controlled by an entity that can be current or non-current, depending on how long the business intends to retain it. For instance, if the business intends to hold the asset for more than one accounting period, it’s a non-current asset, and in an alternate situation, it’s a current asset.

Liability is a present obligation on the business settled by the outflow of economic benefit from the business. Liability can be current or non-current depending on the fact that the business needs to settle liability in the short or long term. For instance, if the liability will be paid in the next 12 months, it’s classified as current and non-current liability when to be paid in more than 12 months.

Equity is residual ownership interest after liabilities are settled from business assets. Equity sub-accounts include share capital, retained earnings, and dividends paid or drawings made by the business.