Every account in your chart of accounts has a type. The type tells you what the account records, and so whether it can hold a purchase.
What are the five account types?
Type | What it records | Examples | Holds purchases? |
Asset | What the business owns, or is owed | Equipment, vehicles, inventory, prepayments, cash, money customers owe | Sometimes |
Liability | What the business owes | Unpaid supplier bills, loans, tax owed, leave owed to staff | Rarely |
Equity | The owners' stake | Share capital, retained earnings | No |
Revenue | Money the business earns | Sales, interest received | No |
Expense | The cost of running the business | Freight, travel, software, repairs, wages | Mostly |
Revenue and expense accounts make up the profit and loss. They start at zero each year.
Asset, liability and equity accounts make up the balance sheet. They carry their balance into the next year.
Which accounts do I include?
Use this default:
Include expense accounts, except payroll, tax, depreciation and intercompany.
Include balance sheet accounts only where supplier invoices post first. Examples: equipment purchases, inventory, prepayments, and an accrual clearing account.
Exclude revenue, liability and equity accounts.
If you are unsure, include the account and flag it for your finance team.
Why do some asset accounts hold purchases?
Some purchases are not used up in the year. A machine, a vehicle or a pallet of stock is recorded as an asset when it is bought.
Asset account | Count it? | Category |
Plant and equipment, vehicles, IT hardware (at cost) | Yes | Capital goods |
Inventory, raw materials | Yes, where stock invoices first land | Purchased goods and services |
Prepayments | Yes, where the supplier invoice first lands | The category of what was bought |
Accumulated depreciation | No | |
Cash and bank | No | |
Money customers owe (debtors) | No | |
Investments | No |
Why are liabilities usually excluded?
A liability records that you owe money, not what you bought. When a supplier bill arrives, the purchase is recorded in an expense or asset account, and the amount owed is recorded in a liability account. They are two sides of the same purchase. Count the purchase side only.
The exception is a clearing account where your finance team posts supplier invoices first, before moving the cost to expense accounts. See Which period does a cost belong to? and Which liability accounts can hold purchases?
My chart of accounts has other types
Some finance systems use more types:
Type | Treat it as |
Cost of goods sold, cost of sales | |
Other income | Revenue. Exclude. |
Other expense | Expense. Apply the default above. |
What this means in Avarni
Check the Account Type column in your file before you upload your chart of accounts. Avarni's suggestions depend on it.
Avarni sets every Revenue and Liability account to Excluded at upload. If a liability account is where supplier invoices post first, change it yourself before you upload your general ledger.
Avarni suggests Capital goods for asset accounts that hold physical things. That is right for equipment. It is wrong for inventory. Change inventory accounts to Purchased goods and services.