Business transactions are divided into three groups as it has been previously mentioned: expenditure, revenue and financial transactions. According to this division, the accounting accounts can also be presented as three main groups, i.e. account categories: financial accounts, expense accounts and revenue accounts. The accounts of the financial statements (or closing of the books accounts) form the fourth category.
The financial accounts in turn are subdivided into the group of financial assets accounts (cash and receivables accounts) and capital accounts.
Accounting accounts are created according to the needs of the company. Account subgroups can also be used to detail the nature of transactions.
Account groups formation and their relationship with financial statements
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Financial accounts
- 1.1. Financial assets accounts
A financial asset is a company's liquid resource that can be quickly converted into cash. Financial assets accounts track cash and cash equivalents, funds in the various bank accounts, receivables. Examples of financial asset accounts are cash accounts, bank accounts, and accounts receivable.
- 1.2 Capital accounts
In accounting, capital accounts include those accounts that track company's equity and liabilities, i.e. its various debts.
The Equity accounts show the financial transactions of the investments made by the owners, their withdrawals of cash for personal use and retained earnings.
The Liability accounts reflect financial obligations of the company, i.e. its debts: loans obtained from lenders, money a business owes its suppliers, wages payable etc.
- 1.1. Financial assets accounts
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Expense accounts
The costs incurred for acquisition of the factors of production are recorded in the expense accounts. The number of expense accounts depends on how accurately the expenditures are to be broken down.The costs associated with the sale of products, goods or services are summarized on the Sales Expenses Account, wages and salaries paid are recorded to the Salaries and Wages Expense Account, expenditures on equipment goes to the Equipment Expenditure Account, etc. There are also a lot of other expense accounts: construction expenditure, rent expense, repairs expense, transportation expense, supplies expense, utilities expense etc.
The miscellaneous expense account records those expenditures for which, due to their small amount, there are no own account is set aside. This account can contain a large number of minor transactions.
It is worth to mention that interest and taxes differ in nature from the other types of expenses. They are not the acquisition costs of factors of production, but the share of the company's profit that goes to debt capital investors and society.
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Revenue accounts
Revenue accounts record income from the sales of goods and services, rental income, interest income, etc. This category includes, for example, the sales revenue account, rental revenue account, the interest income account and the others. As a rule, companies have fewer revenue accounts compared to expense accounts because revenues are not broken down as detailed as expenses.
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Financial statements accounts or Closing of the books accounts
Operating result is calculated periodically and the financial statements are prepared at the end of each accounting period. Revenue and expense accounts are temporary accounts and must be closed at the end of the reporting period. All revenue and expense accounts’ balances that refer to accounting period are transferred to the appropriate permanent account. Accounts that are closed at the end of each accounting period refer to temporary accounts. These accounts will have a zero balance at the beginning of each next period. All these accounts can be found in the Income Statement.
There are also permanent accounts that are not closed at the end of the accounting period, and their balances transfer over to the following period. These accounts have zero balance only when the business has just begun. Permanent accounts include asset, liability, and equity accounts. Cash, receivables and capital, as well as the remaining values of buildings, equipment, etc., i.e. their remaining balances, are aggregated into a balance sheet account. From there, they are transferred to their own accounts as opening balances again when accounting for the following period begins.