When any business begins the process of bookkeeping it is important to understand how to establish the records as well as what the different types of accounts mean. A balance sheet is laid out to track several different accounts and includes: assets, liabilities, owner’s equity, income, and expenses. Two accounts that typically cause a bit of confusion are the assets accounts and the income accounts. In order to help you understand how the two differ, it is first important to understand the definition of each. Let’s first begin by looking at assets accounts. This account is generally recorded first on the balance sheet, and should include any type of business asset. An asset is simply a type of economic resource. An economic resource is any item that is considered to be tangible or intangible, and has a value to the economy that is positive. Another way to classify an asset is any item that has a particular value which can be turned into cash. The two main classes of assets are tangible and intangible. Tangible assets can include fixed assets and current assets as well. Fixed assets are items such as buildings, property, and equipment. Current assets are items such as inventory. Intangible assets are not physical items or resources, but rather items that have value to the firm due to their role in the market. Examples of intangible assets include: stocks, bonds, accounts receivable, patents, copyrights, trademarks, and even goodwill. Now let’s look into income accounts. Income accounts show what the business has received as revenue for the accounting period in question and will show if the company experienced a profit or a loss. If your business sells many different products or services, each should have a designated income account. This will help you to clearly see where all the sources of income are coming from, as well as which areas need improvement. The sum of all of these accounts will equal total revenue. An income account could be set up in the following manner:
- Product or Service A’s Sales Revenue
- Product or Service B’s Sales Revenue
- Product or Service C’s Sales Revenue (and so forth until you have accounted for all products or services)
- Income from Interest
- Income from Asset Sales
- Income from Consulting, or Miscellaneous
It is not uncommon for companies to only have a couple of income accounts, as this makes bookkeeping a much easier process. Having a large number of accounts can lead to accounting issues that may cause management to have a difficult time deciphering the information. As you can see, both assets and income accounts play a very different, but very important role in business bookkeeping and accounting. The more precise your records are kept, the easier it will be to track your company’s progress, expand, and curtail problems before they become major issues.