Account Types

Here are explanations of the different types of accounts that make up a General Ledger. Every account in your Chart of Accounts must fall into one (and only one) of these categories. These categories are used to create the financial statements for your company. The two main financial statements are the Balance Sheet and the Income Statement. 

In RecWizard, we do not create financial statements. The Account Type is used to determine the “normal balance” of the account you are setting up. This information can be used to double check an account balance to show whether the balance is reasonable - at a very high level.

You might be wondering what we mean by saying an account has a “normal balance”. When our current system of double entry bookkeeping was documented by the Franciscan monk Luca Pacioli in 1494, it was determined that all entries would have debits and credits, and the total of the debits would equal the total of the credits. (These are often abbreviated as DR for debit and CR for credit).

Depending on the type of account you are analyzing or reviewing, the account will usually have a debit balance, or it will usually have a credit balance. Notice the word “usually” – sometimes the balance does not conform to the “normal balance” rule, and that is most often because of an error in recording accounting activity. RecWizard will help you identify these errors so you can correct them on a timely basis.

Here are the rules of debits and credits and the “normal balance” you would expect for a particular Account Type:

When you set up a new account with RecWizard, you will be asked for the Account Type. Based on the type you choose, the account will be set up to expect a “normal balance” as shown in the table above. You can change the account type in the Application Setup section of RecWizard if necessary.

Balance Sheet Account Types – Asset / Liability / Equity

The first three types to be discussed are the Balance Sheet account types. These accounts represent a picture of your company at a particular point in time. A Balance Sheet is always described with the phrase “as of”, as shown in this example:

While many transactions may go in to and out of a Balance Sheet account, the ultimate goal is to “stop the clock” on a certain date and report the balances in all the Balance Sheet accounts as of that same date.

One of the main goals of RecWizard is to help you verify that you have stopped the clock correctly. Monthly reconciliations of all of your Balance Sheet accounts is critical to good record keeping requirement.

There are three types of Balance Sheet accounts – Asset, Liability and Equity - and you can find out more about these by clicking on the appropriate link. You will also find examples of accounts that would fall into each of these categories.

There is one other type of Balance Sheet account that assists in preparing reconciliations. It is the Contra-Asset account type. It has a specialized use as a sort of "sub-category" of Assets. You can find out more by clicking on the appropriate link.

Income Statement Account Types - Income / Expense

The remaining two categories to be discussed are the Income Statement account types. These accounts show the results of activity over a defined period. An Income Statement is always described with the phrase “for the ________ ended”, as shown in this example:

At the end of the annual accounting period, the Income Statement accounts are “closed” to the retained earnings account and start over again at zero.

While the main goal of RecWizard is to assist with creating Balance Sheet analysis, we found that with some creative thinking you can also keep track of special Income Statement account information. Examples of accounts you might want to track with RecWizard are included in the more detailed descriptions of the account types.

There are two types of Income Statement accounts – Income and Expense - and you can find out more about these by clicking on the appropriate link.

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