Contractor License Practice Exam

How many basic account types does accounting have?

1. Three

2. Five

3. Seven

4. Ten

The correct answer is: Five

Accounting fundamentally comprises five basic account types: assets, liabilities, equity, revenues, and expenses. Each of these categories plays a crucial role in understanding an organization’s financial health and operational performance. Assets are resources owned by the business, such as cash, inventory, and property. Liabilities represent obligations that the company owes to others, like loans and accounts payable. Equity indicates the owner's claims against the assets of the business after all liabilities have been deducted. Revenues are the income generated from normal business operations, and expenses reflect the costs incurred in the process of generating that revenue. This classification into five basic account types forms the foundation of the double-entry accounting system, which ensures that every financial transaction affects at least two accounts, thus maintaining the balance between assets, liabilities, and equity. Understanding these five basic account types helps individuals comprehend financial statements and facilitates better decision-making in financial management.