Account Titles

     Despite the fact that the typical business has many different assets and liabilities, it would still be possible for an accountant to record all transactions solely in terms of three accounts -- assets, liabilities, and owners' equity. At the other extreme, an accountant could record business transactions in terms of the precise item affected. For example, the purchase of pencils for cash could result in a detailed entry disclosing our acquisition of five #2 pencils, each seven inches long, in exchange for one 1992 nickel, one 1994 dime, and three 1991 quarters.
     When we give consideration to the usefulness of the data in either of the two forms mentioned, we realize that the most efficient recording would be somewhere between the two extremes mentioned. It is customary for accountants to summarize similar items under particular account titles. The summarization would be to the degree necessary to provide those involved in investment and/or credit decisions with needed accounting information while eliminating the recording of useless data.
     In any business, the accounts used would depend upon the kinds of assets owned, the kinds of debts owed, and the information to be secured from the accounting records. Although the particular accounts used would vary from one business to another, the following accounts are commonly used:

ASSET ACCOUNTS

CASH - cash includes coins, currency, bank deposits, checks, postal and express money orders, and bank drafts

NOTES RECEIVABLE - notes receivable are unconditional written promises of customers or others to pay a specified sum of money on a designated or determinable future date to the order of a named person or to bearer, the person holding the note.

ACCOUNTS RECEIVABLE - goods and services are commonly sold to customers on the basis of oral or implied promises of future payment. Such sales are known as "sales on credit" or "sales on account'; the oral or implied promises that are received are known as accounts receivable.

OFFICE SUPPLIES - the pencils, pens, postage stamps, and other similar items for the general operations of the business

STORE SUPPLIES - the boxes, cord, paper, bags, sacks, and other similar items used in connection with the sale and delivery of merchandise.

PREPAID EXPENSES - prepaid expenses represent payments made for items or services that have not yet been received. Each type of prepaid expense is normally accounted for in a separate account which carries the name of the item. Examples of prepaid expenses would be Prepaid Insurance, Prepaid Rent, Prepaid Interest, and Prepaid Taxes.

DELIVERY EQUIPMENT - all equipment used to deliver goods to customers is classified as Delivery Equipment. Motorcycles and motor trucks are examples

STORE EQUIPMENT - examples of store equipment include cash registers, counters, scales, showcases, shelving, window decorations and other merchandise-displaying facilities and furniture used directly in selling merchandise

OFFICE EQUIPMENT - chairs, desks and tables, office machines such as calculators, bookkeeping machines, computers and other electronic data-processing machines, and typewriters required for the general operation of the business are included under the title Office Equipment. this equipment is not used directly in selling merchandise.

BUILDING - structures owned and used in conducting the regular operations of the business are shown as Buildings. A building used by a business in carrying on its operations may be a store, garage, warehouse, or factory

LAND - the acreage, ground, or lot which is owned and used in the regular operation of the business is shown as Land

LIABILITY ACCOUNTS

NOTES PAYABLE - written unconditional promises, made by a representative of the business, to pay a specified sum of money on a designated or determinable future date are shown as Notes Payable. The business may issue notes to banks or others when borrowing cash, to creditors for merchandise purchased, or to businesses or companies for other assets acquired.

ACCOUNTS PAYABLE - an account payable is an amount owed to a creditor which resulted from either an oral or implied promise to pay. Most accounts payable grow out of the purchase on credit of merchandise, supplies, equipment, and services

OTHER SHORT-TERM PAYABLE - wages payable, taxes payable, rent payable, and interest payable are additional short-term liabilities for which individual accounts must be kept

MORTGAGE PAYABLE - a mortgage payable is a long-term debt for which the creditor has a secured prior claim against some one or more of the debtor's assets. The mortgage gives its holder, the creditor, the right to force the sale of the mortgaged assets through a foreclosure if the mortgage debt is not paid when due.

BONDS PAYABLE - long-term debt evidenced by formal written contract or indenture. Usually, the liability extends to a number of creditors, each of whom holds one or more bond certificates.

OWNERS' EQUITY ACCOUNTS

CAPITAL ACCOUNTS - when a person invests in a business of his/her own, his/her investment is recorded in an account carrying his/her name and the word "Capital". For example, an account called "John Doe, Capital" is used in recording the investment of John Doe in his business. In addition to providing a place for recording the original investment, the Capital account is also used in recording any permanent increases or decreases in proprietorship.

WITHDRAWALS ACCOUNT - usually a person invests in a business to earn a net income. However, income is earned over a period of time, say a year, and often during this period the business owner finds it necessary to withdraw a portion of the earnings to pay living expenses or for other personal uses. These withdrawals reduce both assets and owner equity. To record a withdrawal, an account carrying the name of the business owner and the word "Withdrawals" (or "Drawing") is used; for example, John Doe, Withdrawals. In law and custom it is recognized that withdrawals by the owner of an uinincorporated business for personal living expenses are neither a salary nor an expense of the business, but are withdrawals in anticipation of the net income the business is expected to earn.

REVENUE AND EXPENSE ACCOUNTS - revenues increase and expenses decrease owners' equity. All businesses do not have the same revenues and expenses. Consequently, it is impossible to list all the revenue and expense accounts found in business ledgers. However, Sales, Revenue from Repairs, Services Income, Commissions Earned, Fees Earned, Interest Earned, and Rent Earned are common examples of revenue accounts; and Advertising Expense, Supplies Expense, Depreciation Expense, Salaries Expense, Rent Expense, Utilities Expense, Insurance Expense, and Miscellaneous Expense are common examples of expense accounts.