ALORE: The Five Basic Types of Accounts

The five basic types of accounts that you will be required to use are assets, liabilities, owner's equity, revenues and expenses. There are other types of accounts, such as contra-asset accounts, gain accounts and loss accounts, but these latter three types are, essentially, variations of the five basic account types. (Please note that owner's equity can also refer to stockholder's equity, partner's equity, member's equity, etc. depending upon the legal organization of the business.)

ALORE is the acronym that you should memorize as it summarizes the five basic account types in their proper order. Proper order refers to how a balance sheet, chart of accounts, trial balance, general ledger, etc. are organized. In general, you will address assets first, liabilities second, owner's equity third and so on.

In one form or another, all accounting activity will ultimately be summarized into these five basic types of accounts.

Debits and Credits

The confusion surrounding these two terms most often comes from how you use debits and credits in your personal checkbook and how you use them in business bookkeeping.

The first thing to remember is the definition of each term. A debit is simply an entry on the left-hand side of the bookkeeping entry. A credit is simply an entry on the right-hand side of the bookkeeping entry.

When you record a deposit in your personal checkbook, you record it as a credit, but when you record a deposit in your business cash account, you record it as a debit. This difference in recording is what causes the confusion. While you are being correctly instructed to record increases in cash, better known as deposits, by using a debit in your business books, there is probably a little voice in the back of your mind wondering how this can be correct if you have always recorded deposits in your personal checkbook by using a credit.

If you are practicing debit and credit entries, you have been instructed that asset accounts, such as cash, are increased by debits and decreased by credits. You have also been instructed that liability accounts, such as accounts payable, are decreased by debits and increased by credits. Therefore, if you look at your personal checkbook as your bank's set of businees books, the confusion is eliminated. While banks hold your cash on deposit, it is a liability for them because they are responsible to you for your money. When your bank takes your deposit, they increase their cash account with a debit and your deposit account with a credit. That is, they increase the amount of their liability to you - the amount in your deposit account - with a credit.

For each individual bookkeeping entry, total debits MUST equal total credits. By extension, total debits must equal total credits for all bookkeeping entries. When you make an entry, you should enter the debit side first.

You will encounter many more accounting terms and concepts, but if you can learn and understand the above items, you will be well on your way to being able to understand all accounting concepts and terms.

* Italicized phrases are accounting terms to which you will be introduced if you have not been already.