Utah General Contractors - Business and Law Practice Exam

Accounting is based on how many basic account types?

1. 3

2. 5

3. 7

4. 10

The correct answer is: 5

Accounting is fundamentally built on five basic account types, which are crucial for organizing financial information. These account types are: 1. **Assets**: Resources owned by a business that have economic value. 2. **Liabilities**: Obligations or debts that a business owes to outside parties. 3. **Equity**: The owner’s residual interest in the assets after deducting liabilities, often referred to as net worth. 4. **Revenues**: The income generated from normal business operations, typically from the sale of goods or services. 5. **Expenses**: The costs incurred in the process of earning revenues, which reduce the overall income of a business. These five account types form the foundation of financial accounting and reporting, allowing for a comprehensive understanding of a business's financial health. Each type has its specific role in tracking and managing financial transactions, and together they help create the balance sheet and income statement, which are essential components of financial statements. Understanding these account types is pivotal for anyone involved in accounting or finance.