What are the 5 asset accounts?

5 Min. Read

July 20, 2022

A chart of accounts is a small business accounting tool to organize the important accounts that help create your business’s financial statements. Your chart of accounts is a useful document that lets you present all the financial information about your business in one place, giving you a clear picture of your company’s financial health. The chart of accounts organizes your finances into five major account types, called accounts: assets, liabilities, equity, revenue, and expenses.

These topics will help you better understand what a chart of accounts is and how small businesses use it:

What Is a Chart of Accounts Used For?

What Are the Five Major Accounts?

Why Is a Chart of Accounts Important?

NOTE: FreshBooks Support team members are not certified income tax or accounting professionals and cannot provide advice in these areas outside of supporting questions about FreshBooks. If you need income tax advice, please contact an accountant in your area.

What Is a Chart of Accounts Used For?

Small businesses use the chart of accounts to organize all the intricate details of their company finances into an accessible format. It’s the first step in setting up your business’s accounting system. The chart of accounts clearly separates your earnings, expenditures, assets, and liabilities to give an accurate overview of how your business is performing financially.

The chart of accounts organizes your finances into numbered account types. Most businesses follow this consistent, commonly accepted account numbering system:

• 1000 - 1900: Assets
• 2000 - 2900: Liabilities
• 3000 - 3900: Equity
• 4000 - 4900: Revenue
• 5000 - 5900: Expenses

Although it’s not necessary that you follow that format, businesses generally follow the same numbering system for the chart of accounts because it makes it easier for an accountant or bookkeeper to step in and translate the information into standard financial reports. If you’ve worked on a general ledger before, you’ll notice the accounts for the ledger are the same as the ones found in a chart of accounts.

What Are the Five Major Accounts?

The five major account types provide the structure for your chart of accounts, breaking it down into separate types of information. Several important financial reports are built around the same five account types. The five major account types you’ll use to create your chart of accounts are:

• Assets: Assets are resources owned by your business that can be converted into cash and therefore have monetary value. Examples of assets include your accounts receivable, vehicles, property, and equipment.
• Liabilities: Liabilities are debts that your company owes to someone else. This would include your accounts payable, any taxes you owe the government, or loans you have to repay.
• Equity: The role of equity differs in the chart of accounts based on whether your business is set up as a sole proprietorship, LLC, or corporation. This would include Owner’s Equity or Shareholder’s Equity, depending on your business’s structure. The basic equation for determining equity is a company’s assets minus its liabilities.
• Revenue: Revenue is the amount of money your business brings in by selling its products or services to clients.
• Expenses: Expenses refer to the costs you incur while running your business. This would include your office rent, utilities, and office supplies.

Why Is a Chart of Accounts Important?

The chart of accounts allows you to organize your business’s complex financial data and distill it into clear, logical account types. It also lays the foundation for all your business’s important financial reports. A chart of accounts is more than just an organizational tool, though. Having all your financial data in one place and seeing how the different accounts relate to one another can provide important insights into your business’s performance. Here are some ways a chart of accounts can benefit your business:

1. Understand Your Earnings

A chart of accounts gives you great insight into your business’s revenue beyond just telling you how much money you earn. It shows peaks and valleys in your income, how much cash flow is at your disposal, and how long it should last you given your average monthly business expenses.

2. Get a Grip on Debts

A chart of accounts gives you a clear picture of how much money you owe in terms of short- and long-term debts. Your chart of accounts can help you determine how much of your monthly income you can afford to put toward your debts and help you develop longer-term debt repayment plans.

3. Spend Smarter

It’s not always fun seeing a straightforward list of everything you spend your hard-earned money on, but the chart of accounts can give you an important view of your spending habits. You can get a handle on your necessary recurring expenses, like rent, utilities, and internet. You can also examine your other expenses and see where you may be able to cut down on costs if needed.

4. Improve Your Reporting

A chart of accounts organizes your finances into a streamlined system of numbered accounts. Having an accurate chart of accounts makes it easier for you or an accounting professional to develop in-depth financial reports to help you understand your company's financial position, including a cash flow statement, balance sheet, and income statement. You can customize your chart of accounts so that the structure reflects the specific needs of your business.

5. File Taxes

An added bonus of having a properly organized chart of accounts is that it simplifies tax season. The chart of accounts tracks your business income and expenses, which you’ll need to report on your income tax return every year.

If you’re using accounting software and want to set up a customized chart of accounts, you can add or edit parent and sub-accounts to the existing default chart of accounts. Doing this will help you stay organized and better understand how your business is doing financially.

RELATED ARTICLES

Assets are one of the most important items on your balance sheet. Whether you’re using your company’s assets to help grow revenues or you’re employing them as collateral when you take out a loan, there are a broad range of uses for assets in accounting. However, there are many different types of assets, and many people aren’t aware of the distinctions between them. Explore the definition of assets in accounting & find out about the types of assets in our comprehensive guide.

What is an asset?

So, what are assets? Essentially, an asset is any resource with financial value that is controlled by a company, country, or individual. There is a broad range of assets that your business may own, create, or benefit from, including real estate, cash, office equipment, goodwill, investments, patents, inventory, and so on. Your balance sheet lists all of your company’s assets and explains how they are financed, i.e., whether through debt, equity, or owned outright.

Understanding the different types of assets with examples

When we speak about assets in accounting, we’re generally referring to six different categories: current assets, fixed assets, tangible assets, intangible assets, operating assets, and non-operating assets. Your assets can belong to multiple categories. For example, a building is an example of a fixed, tangible asset. 

It’s important to make sure that you’re classifying your assets properly, otherwise, you could run into problems. The correct classification of fixed assets in accounting can help you to properly gauge your business’s net working capital, whereas understanding the difference between tangible and intangible assets is an important element of assessing risk and solvency.

Here’s a little more information about the different types of assets with examples:

Current assets

Current assets are assets that can be converted to cash or cash equivalents within the space of one year. They are also referred to as “liquid assets” owing to their importance for your business’s liquidity. Here are some examples of current assets:

• Cash and cash equivalents

• Accounts receivable

• Marketable securities

• Inventory

• Short-term investments

Fixed assets

Fixed assets cannot be converted to cash or cash equivalents within the space of one fiscal year. They are also referred to as “non-current assets” or “long-term assets.” Here are some examples of fixed assets:

• Real estate

• Patents

• Equipment, tools, and machinery

• Furniture

• Long-term investments

Tangible assets

Tangible assets are assets with some kind of physical presence. Here are some examples of tangible assets:

• Real estate

• Cash

• Office supplies

• Vehicles

• Equipment, tools, and machinery

Intangible assets

Intangible assets are assets that aren’t physical but offer long-term value to your company. Here are some examples of intangible assets:

• Trademarks

• Brand recognition

• Goodwill

• Research and development

• Patents

Operating assets

Operating assets are assets that enable your business to generate revenue via your core business operations. Here are some examples of operating assets:

• Equipment, tools, and machinery

• Cash

• Real estate

• Patents

• Inventory

Non-operating assets

Non-operating assets are assets that do not help your business generate revenue via your core business operations but may still help you generate income in other ways. Here are some examples of non-operating assets:

• Unused land

• Marketable securities

• Unallocated cash

• Short-term investments

• Spare equipment

How do different types of assets in accounting work?

Above, we’ve provided you with a guide to the different types of assets, but when it comes to the types of assets on a balance sheet, it’s a little different. Basically, when you’re recording your business’s assets in your accounts, there’s no need to categorize your assets on such a granular level. Most of the time, there are only two types of assets on a balance sheet: current assets and fixed assets.

Furthermore, intangible assets pose issues for classifying different types of assets in accounting, as it’s very difficult to assign a value to them. In any case, there’s no standardized valuation method. How do you value your business’s “brand recognition,” for example? Ultimately, if you aren’t able to accurately assign a value to an intangible asset, you cannot report it on your balance sheet.

It’s also important to note that the different types of assets in accounting are expensed in different ways. Although both processes describe similar things, depreciation is used for tangible assets (assets with a physical presence), whereas amortization is used for intangible assets. It’s essential to get this right, as depreciation and amortization can have a meaningful impact on your business’s taxable income.

Interested to find out how your company can use assets to generate sales? Take a look at how to calculate total asset turnover ratio.

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