Asset and liability accounts

What it means

Asset and liability accounts are the two basic types of balance sheet accounts in double-entry bookkeeping. Asset accounts record assets, what the business owns, such as cash, receivables, inventory or machinery; liability and equity accounts record liabilities and equity, how those assets are financed: equity, loans and payables.

The type of account decides on which side the opening balance and increases are recorded. An asset account has its opening balance and increases on the debit side and decreases on the credit side; a liability account the reverse.

At the end of the period an asset account normally has a debit balance and a liability account a credit balance. The balances of all asset accounts make up the assets side of the balance sheet, those of liability accounts the other side, and both must agree.

How it works in practice

Every transaction is debited to one account and credited to another. When a company pays a supplier from its bank account, the bank asset account falls and so does the payables account, so the balance sheet shrinks equally on both sides.

Some accounts are dual-purpose, such as VAT settlement or shareholder current accounts, and can carry a balance on either side depending on the situation. In the balance sheet they then appear as either a receivable or a payable.

Understanding account types helps read an account balance and spot errors. A negative cash balance or a credit balance on an inventory account is impossible and always signals a wrong entry.

What to watch out for

A common beginner's mistake is to get the side wrong for allowances and accumulated depreciation. Although they relate to assets, they carry credit balances and reduce asset values on the balance sheet rather than being liabilities.

For dual-purpose accounts the balance must be presented correctly. Netting receivables and payables with the same partner without agreement breaches the no-offsetting rule.