Lesson 4: Accounts

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The Golden Rule

of Accounting

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Debits & Credits

Bookkeeping is all about accounts. When you read/hear "accounts," you probably think of a bank account or credit card account; some type of account that you open with a financial institute. Well, accountants and bookkeepers hear "accounts" and think about the building blocks of financial systems. We think about the dozens of expense accounts, income accounts, asset accounts and liability accounts that form the complex accounting systems for million dollar companies. Accounts are used as a classification/organization system within the golden rule. It is because of these accounts that accountants and bookkeepers are able to make sense of millions of transactions and billions of dollars. Detailed financial statements and financial reports are essentially the summary of the results of all these accounts, rolled up into an easy to digest presentation.

Remember the closet example from Lesson 1? In that example, accounts are likened to colors and styles of clothes. By applying each clothing item to the appropriate style and color, you are left with a complete picture of your wardrobe. The different categories (or accounts) act as the ultimate organization system. PS - The closet example also highlights a hidden gem of bookkeeping; the organization principles can be applied to more than just finances!

Accounting systems utilize accounts on two primary levels:

  1. Individual Transactions: When a company makes a purchase or receives a payment, the transaction must be added to the books. When it is added, it is tagged to the proper account (either manually or automated).

  2. Balance Tracking: Since every transaction is tagged to an account upon addition, each account acts as a running tracker of all transactions tagged to it. This gives you a real-time balance tracker for many categories of financial activity.

The figures below will show you what I mean. Figures 4A-C are examples of the transaction entry screen for three cash transactions and Figures 4D-F show what is happening simultaneously to the Cash Account as each transaction is added:

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Figure 4A

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Figure 4D

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Figure 4B

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Figure 4E

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Figure 4C

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Figure 4F

The full list of accounts used in a financial system is called the Chart of Accounts and every company has one. Similarly, individuals have a chart of accounts that help to form each of our own accounting systems (if you make and/or spend money, you have some kind of accounting system whether you know it or not). Every transaction we incur in our lives flows through these accounts in the manner shown in the figures above. The list below is an example of a personal finance Chart of Accounts:

Asset Accounts:

  • **Checking Account (activity & balance of your Checkings)

  • **Savings Account (activity & balance of your Savings)

  • **Cash account  (activity & balance of paper money in your wallet, safe, under the mattress, etc)

  • Brokerage Account (activity & balance of your taxable investment account)

  • 401k/IRA (value of your retirement investment accounts)

  • Bitcoin/crypto (value of your crypto wallets)

  • Home/Property Value (market value of all homes/properties you own)

  • Vehicle Value (market value of all vehicles you own)

  • Small Business Investment (value of all your equity stakes in small businesses)

  • Patents/Collectibles/Misc (value of intangible assets and/or valuable art, cards, collectibles, etc)

  • Short Term Receivable (activity & balance of money owed from family & friends or other pending IOU reimbursements )

**Checkings and savings accounts are called cash alternative accounts. The cash & cash alternative accounts are the most liquid asset accounts possible. Many times, financial folks (myself included) will use "cash" as an umbrella statement for cash & cash alternatives. If I reference the "cash account" then you know I am specifically talking about paper money.

Liability Accounts:

  • Credit Card (activity & balance owed on all credit cards owned)

  • Mortgage (activity & balance owed on any outstanding home/property loans)

  • Student Loan (activity & balance owed on all outstanding student loans)

  • Auto Loan (activity & balance owed on all outstanding auto loans)

  • Rental Lease (amount to break current rental lease)

  • Short Term Payable (amounts owed to family & friends or other pending IOU debts)

Equity Accounts:

  • Income (inflow from primary sources)

    • Primary Income ​

    • Secondary Income

  • Expenses (outflow to pay for things)

    • Rent​

    • Gas

    • Insurance

    • Food

    • Entertainment

    • Kids

    • Interest Expense

  • Other Income (gains from non-primary sources such as investments, gambling, furniture/gadget resale, etc.)

  • Retained Earnings (running Net Worth balance from all years previous)

These are only some of the dozens of possible accounts depending on the different financial activity someone may have. Accounts are unlimited and fully customizable, which is what makes them such effective tracking mechanisms. If you want to track money spent on groceries separate from money spent at restaurants, then your accounts can be set up to track them exactly like you want. If you want to track the money you spend at a liquor store separate from money spent on drinks on nights out, your accounts and accounting system can be setup to do so. If you'd like to track money spent on each individual child you created, it would take some unique bookkeeping methods but it's definitely possible. Accounting and bookkeeping keep finances organized and accounts are key components in that.

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