Naming your Current Asset Accounts is the third step in setting up the Chart of Accounts in bookkeeping basics. There are three types of assets in business: Current, Fixed and Other. A Current Asset is something that is cash now or is expected to turn into cash within a year. There are a number of different current asset accounts that can be used. Which ones you need depends on the type of business you have. Read through the following descriptions to see which apply to yours.
A business Bank Account is a current asset because the balance can be turned into cash. Accounts Receivable is one also and is covered on another page.
Petty Cash is one of the most common accounts used in bookkeeping basics. It is usually kept at the business in a cash box of some kind and is kept on hand for smaller expenses or when an employee is sent to the office supply store for example to make a purchase for the business. A petty cash log is necessary to keep track of the amount of cash used on a particular day and for what it was used. Petty cash is usually reimbursed by writing a check and cashing it at the bank for the desired amount to be deposited into the cash box. It can also be money in a cash register that is kept for making change to customers who use cash to make their purchases.
Cash on Hand
Cash on Hand is cash received by a business, but that is not meant for petty cash, but to be deposited in a bank account. Cash on Hand is also money received by credit card payment. When a customer pays by credit card, the transaction is processed by a credit card processing company, but is not deposited immediately in the bank account associated with the business’ merchant account. So that money is considered received, but not deposited and therefore Cash on Hand. It is therefore a current asset account, because it will be deposited within a few days.
Contracts in Transit
One current asset account you may have never heard of is Contracts in Transit. This is used for businesses such as car dealerships. Once a dealership has a signed contract, they look for a bank which will buy the contract. So until the dealership received a check from the bank, a signed contract is considered a current asset as it will soon turn into cash and be deposited into a bank account.
Bank Reserve Account
Related to the Contracts in Transit account is an account called a Bank Reserve Account. This account is controlled by the bank that a car dealership for example would be selling its contracts to. The bank would deposit the money from Contracts in transit into this account. If the customer fails to pay the contract or pays it off early, the bank can reverse funds out of this account as well.
Security Deposits & Last Month’s Rent
If a business has made a security deposit or a deposit of the last months rent for a building or office space, this money paid is also considered a current asset. The business may receive this money back in the future as in the case with a security deposit, or the money will eventually be applied to the rent. This type of account is called Prepaid Assets or Prepaid Deposits.
Employee Accounts Receivable
When a company loans money to an employee as cash or an advance on their paycheck, this money is tracked by Employee Accounts Receivable in order to keep these items separate from business with customers, and because in most cases the money is loaned as an advance and is withheld from an employees check, so that the business can be assured of being paid back.
Factory Warranty Claims
Factory Warranty Claims account tracks the amount of repairs performed by a dealership that it will invoice to manufacturer for reimbursement. Factory Refunds or Rebates would also apply to a business like a car dealership for promotions by Manufacturers.
As you can see by the two Current Asset accounts just mentioned, each business has its own unique chart of accounts. Being detailed and accurate in the bookkeeping process is of utmost importance. Keep this in mind as you learn bookkeeping basics, but at the same time be careful of creating too many sub-accounts as it could make things too complicated.