The five core accounts in Bookkeeping Services in Knoxville, often referred to as the five elements of accounting, are the foundational categories used to classify every single financial transaction in a business. They are collectively known by the acronym A-L-E-R-E: Assets, Liabilities, Equity, Revenue, and Expenses.
These five accounts are the building blocks of the primary financial statements and form the basis of the fundamental accounting equation:
Assets=Liabilities+Equity
1. Assets (A)
Assets are what the business owns. They are resources that hold economic value and are expected to provide a future benefit.
Examples: Cash in bank accounts, Accounts Receivable (money owed to the business by customers), Inventory, Equipment, Land, and Buildings.
Location: Listed on the Balance Sheet.
The Rule: Increases with a Debit, decreases with a Credit.
2. Liabilities (L)
Liabilities are what the business owes to outside parties. They represent a future obligation to pay money or provide services.
Examples: Accounts Payable (bills the business owes to vendors), Loans Payable (business loans), Deferred Revenue (money received for services not yet delivered), and Unearned Revenue.
Location: Listed on the Balance Sheet.
The Rule: Increases with a Credit, decreases with a Debit.
3. Equity (E)
Equity represents the owner’s stake in the business. It is the residual interest in the assets after deducting liabilities (i.e., the net worth of the business).
Examples: Owner’s Capital (initial investment), Owner’s Draws (money taken out by the owner), and Retained Earnings (cumulative profits kept by the business).
Location: Listed on the Balance Sheet.
The Rule: Increases with a Credit, decreases with a Debit.
4. Revenue (R)
Revenue (or Income) is the money the business earns from its primary operations, such as selling goods or providing services.
Examples: Sales Revenue, Service Revenue, Interest Income, and Rent Income.
Location: Listed on the Income Statement (P&L).
The Rule: Increases with a Credit, decreases with a Debit.
5. Expenses (E)
Expenses are the costs incurred by the Accounting Services in Knoxville the process of generating revenue. These costs represent the consumption of assets or the use of services.
Examples: Rent Expense, Utilities Expense, Wages Expense, Supplies Expense, and Cost of Goods Sold (COGS).
Location: Listed on the Income Statement (P&L).
The Rule: Increases with a Debit, decreases with a Credit.