There are 4 types of accounts on the Chart of Accounts:
- Assets- appear on the balance sheet, are property the firm owns (cash, work in process, accounts receivable, furniture, buildings, etc).
- Liabilities & Equity- appear on the balance sheet, liabilities are the amount owed by the firm (accounts payable, line of credit, loans), equity is the shareholders investment in the firm (retained earnings, partners draws).
- Revenue- income to the firm, appear on the income statement.
- Expenses- operating costs of the firm, appear on the income statement.
In summary:
| Balance Sheet | Income Statement (P&L) |
| Assets (debits) | Expenses (debits) |
| Liabilities & Equity (credits) | Revenues (credits) |
Income Statement (P&L):
- Tells the firm if they are bringing in enough money to cover their expenses.
- Current earnings are reported as the net income.
- Prior year earnings are reported as retained earnings.
Balance Sheet:
- Shows how much a firm owes in comparison to what they own.
- Assets = Liabilities If they don’t, then either all the accounts are not on the financial statement layouts or the G/L is not in balance.
Year End closing tips:
- Year end is basically one big journal entry.
- The income statement accounts are cleared to zero.
- Debits are entered to the revenue accounts.
- Credits are entered to the expense accounts.
- The difference (net income) is credited to retained earnings on the balance sheet. A net loss is debited to retained earnings.