Every category in your chart of accounts falls into one of these five account types: asset, income, equity, liability, or expense.
Assets are things of value that your business owns. An asset can be something tangible like cash, a bank account, property, or a piece of equipment. Or it can be something intangible, like intellectual property or goodwill.
Examples of common asset accounts include bank accounts like checking or savings accounts, inventory, buildings or equipment, and accounts receivable, which is money your business is owed by customers for products or services you've provided.
Income is revenue that your business earns. This can be operating revenue from the goods or services that your business sells or passive revenue from things like investments.
Try using income accounts in Wave to track how different products or services perform with your customers. For example, if you sell wedding photography packages and family portrait packages, creating one income account for wedding photos and another for family photos means you'll be able to see if one package sells better than the other, or how each product performs across a year.
Expenses are outflows of funds from your business to pay for goods and services that your business uses.
Your Wave account will be set up with common business expense accounts, like Office Supplies, but you can always add more based on your specific business needs. Just like with income accounts, use expense accounts to track your different business costs and gain deeper insight into your business.
Liabilities are funds your business owes to other parties—in other words, debt. Credit card balances, business loans or lines of credit, and outstanding bills or sales tax due to the government are all examples of common business liabilities.
Equity represents the difference between your assets and liabilities and measures the net worth of your business. In other words, equity is what would be left over if you sold all your business assets and paid all your debt.
You add equity to your business when you or someone else invests money in the business. You draw equity from your business by taking money from it for personal use.