There are two types of account in accounting system, one is balance sheet account which carries remain balance to the next year and another one is profit & loss account which becomes zero at the end of each & every year.
Balance Sheet Account: Balance sheet account includes three ledger accounts i.e. asset, liability, capital/Equity.
Asset: Asset is a resource having future economic value owned by an individual (owner) or company. Some prepaid amount like insurance, promotion advertising cost, office rent etc. Asset is a valuable than any other resource as using it a company/ business can raise some finance.
Assets can be:
- Short term investments
- Accounts receivable
- Prepaid expenses
- Raw materials
- Cash equivalents
Liability: Liability is the amount owed by a company to its suppliers, lender, bank and other service or goods providers. In balance sheet asset account always debited and liability credited.
- Loans payable
- Bond payable
- Wage payable
- Income taxes payable
- Customer deposits
- Deferred revenue
Owner’s Equity: Owners’ equity is an asset for the owner. It total amount left after deducting total liabilities from total asset.
Owners’ equity= Total Asset – Total liabilities
Owners’ equity shows the earnings of the owner. To find total asset, add long-term asset (deposits, fixed assets, long term investments etc.) with current asset (cash, cash equivalents, inventory, prepaid expenses etc.) and then to get total liabilities, add long-term liabilities (Bond, Mortgage, loan etc.) with current liabilities (accounts payable, accrued expenses, deferred revenue, line of credit etc.) of the company.
Profit & Loss Account: Profit & loss account includes income, cost of sales, expense ledger accounts.
Income: It’s the total amount of money a business earned in exchange of goods or service.
Expense: When a business / entity spend or invest its money in day to day operations, it referred as expense. Expenses also marked as liability in the balance sheet.
Cost of Sales: Cost of sales is the total amount of goods sold. It reflects on the top of income statement. Retailers use cost of goods term in place of cost of sales.