# Accounts, and the five types

> Every account belongs to exactly one of five types, and its type decides which side increases it. Get the type right and the entry writes itself.

Source: https://lopifi.com/learn/accounts-and-the-chart
Part of: Lopifi — US GAAP books on autopilot, reviewed by a CPA (https://lopifi.com)

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**What is a chart of accounts and what are the five account types?** Every account belongs to exactly one of five types, and its type decides which side increases it. Get the type right and the entry writes itself.

An [Account](https://lopifi.com/md/glossary/account) is a bucket with a name and a number, and the [chart of accounts](https://lopifi.com/md/glossary/chart-of-accounts) is the list of them. It is the one piece of setup that is genuinely hard to change later, because every entry ever posted points at it — so the goal is the smallest chart that answers the questions you actually ask.

Northwind runs eighteen accounts. That is enough for a real month with real judgment in it, and small enough to hold in your head.

*[Chart of accounts]*

Northwind's chart of accounts. The numbering is convention, not GAAP: 1000s assets, 2000s liabilities, 3000s equity, 4000s revenue, 5000s and 6000s expenses.

*[Interactive figure: chart of accounts]*

Northwind's chart, in number order: 1000s assets, 2000s liabilities, 3000s equity, 4000s revenue, 5000 and up expenses. The number says what kind of account it is before the name does.

## Normal balances

Each type has a side that increases it — its [normal balance](https://lopifi.com/md/glossary/normal-balance). This is not a convention you memorise and then apply; it falls straight out of the equation. Assets sit on the left of `A = L + E`, so assets increase on the left. Liabilities and equity sit on the right, so they increase on the right. Revenue increases equity, so it behaves like equity. Expenses decrease it, so they behave the opposite way.

| Type | Increases on | Decreases on | Northwind example |
| --- | --- | --- | --- |
| Asset | Debit | Credit | 1000 Cash — operating |
| Liability | Credit | Debit | 2000 Accounts payable |
| Equity | Credit | Debit | 3000 Common stock |
| Revenue | Credit | Debit | 4000 Revenue |
| Expense | Debit | Credit | 6000 Payroll expense |

Learn this table and you never have to memorise another rule about debits.

> **A balance on the wrong side is a signal, not a bug.** A credit balance in accounts receivable is legal — a customer overpaid, or paid before being invoiced. It is also worth looking at every single time, which is why the trial-balance check in lesson 7 flags any account sitting on the wrong side rather than hiding it. And if it is material, the balance sheet shows it as a liability — money owed back to a customer — not as a negative receivable.

## Contra accounts

One account in Northwind's chart breaks the pattern on purpose. **1590 Accumulated depreciation** is an asset account that carries a credit balance, because it exists to be subtracted from the van. That is a [contra account](https://lopifi.com/md/glossary/contra-account): it is presented as a deduction from its parent, so the balance sheet can say both *the van cost $24,000* and *$500 of it has been used up*, instead of quietly showing $23,500 and losing the cost forever.

**Wrong:** 1500 Vehicles    23,500

**Right:** 1500 Vehicles    24,000
1590 Accumulated depreciation   (500)

Netting a contra account into its parent destroys information a reader needs — how old the asset is, and how much life is left in it.

**Exercise — Sort eight accounts into five types.** Set the type on every row. Two are traps: deferred revenue has the word revenue in it and is a liability, and accumulated depreciation carries a credit balance and is still an asset — a contra asset. Type it in the workbook at https://lopifi.com/playground.

**Check yourself.** 2400 Deferred revenue holds a customer's deposit for goods not yet delivered. What type of account is it?

- Revenue — it has the word in its name. — The name is about what it will become. Today Northwind owes the customer goods, and an obligation is a liability.

- Liability — it is goods Northwind still owes. — Deferred revenue is an obligation to deliver. It becomes revenue only when the goods change hands, which for this deposit is October.

- Equity — the customer has a claim on the business. — Equity is the owners' residual claim. A customer's claim is a creditor's claim, settled by delivering goods or refunding cash.

- **Lesson:** 3 of 13 — 9 min
- **Terms taught:** [Account](https://lopifi.com/md/glossary/account), [Chart of accounts](https://lopifi.com/md/glossary/chart-of-accounts), [Normal balance](https://lopifi.com/md/glossary/normal-balance), [Contra account](https://lopifi.com/md/glossary/contra-account), [Asset](https://lopifi.com/md/glossary/asset), [Liability](https://lopifi.com/md/glossary/liability), [Equity](https://lopifi.com/md/glossary/equity), [Revenue](https://lopifi.com/md/glossary/revenue), [Expense](https://lopifi.com/md/glossary/expense)
- **Previous:** [The accounting equation](https://lopifi.com/md/learn/the-accounting-equation)
- **Next:** [Debits and credits](https://lopifi.com/md/learn/debits-and-credits)
- **The course:** https://lopifi.com/learn