Skip to main content

The DEALER Method in Accounting

Sandrene is an ACCA candidate pursuing a B.C degree in accounting and finance with 5 years of experience in financial services/accounting.

What's the best way to remember the six types of accounts in accounting?

What's the best way to remember the six types of accounts in accounting?

What Is an Account in Accounting, and How Can You Remember the Six Main Types?

A major part of accounting is recording business transactions. There are numerous different types of transactions that a business may undertake in its operations. In order to organize and manage the information, these transactions are recorded a specific way.

A record is created for each kind of transaction, for example, sales. This is called an account (T-account). In each account, entries are inputted to keep track of all activities of that account for a specific period. These accounts/T-accounts are placed into six main categories:

  1. Drawings
  2. Expenses
  3. Assets
  4. Liabilities
  5. Equity
  6. Revenue

Many students or beginners often complain they have a hard time remembering these Accounts and what they are. Is there a way to retain this information?

"If you want to remember something, you must first understand it."

— Sandrene Bryan

The DEALER Method: The Hack to Make Sure You Never Forget

Here's a simple acronym that I wish I'd known when I was an accounting beginner:

  • D - Drawings
  • E - Expenses
  • A - Assets
  • L - Liabilities
  • E - Equity
  • R - Revenue

This acronym has helped many people master accounting and ace their exams. It works for me every time—you should try it.

Now, let's take a look at what each of these accounts is about.

how-to-remember-the-six-typescategories-of-accounts-in-accounting-the-dealer-method

1. D - Drawings

From time to time, owners of the business may feel the need to withdraw some of the assets of the business for their personal use, which can be cash or other physical assets. This is normally referred to as drawings. For example:

  1. Bob takes cash out of his restaurant's cash register to pay his personal water bill at home. This is referred to as a cash drawing.
  2. Bob takes home a stove from the restaurant to replace the one he had at home. This is an example of other asset drawing.

There are also times when business owners (usually shareholders) are paid a portion of the net income that the business makes. A shareholder is a person or entity who owns shares in the company.

The portion paid from net income is called a dividend, which is also considered to be a form of drawings because it cannot be accounted for as an expense (to be explained next) since it is an allocation of net profit. For example, Apple Inc Pays its shareholders a dividend of $.20 per share. Therefore if you had 100 shares in Apple, you would receive $20.00 as a dividend.

2. E - Expenses

Every business spends money or incurs costs during the process of its day-to-day operations of manufacturing products, making sales, delivering goods/services to customers, or handling queries. These types of costs are called expenses. Examples of expenses are rent, utilities, salaries, stationery, interest payments, carriage outwards, etc.

how-to-remember-the-six-typescategories-of-accounts-in-accounting-the-dealer-method

3. A - Assets

Assets are anything owned by the business and are used to make money or provide an immediate or future benefit to the business. Some assets are bought with the intention of using them for a long period and are not easily converted to cash. These assets are called non-current or fixed assets. Examples of these include land, buildings, machinery, motor vehicles, and equipment.

Others assets are bought with the intention to resell at a profit or are acquired with the intention of easily converting them to cash. Examples of these are cash, short-term investments, stock, and debtors (people who bought goods on credit from the business).

Assets are further categorized into tangible and intangible assets. Tangible assets are the ones you can see and touch, such as the examples mentioned before. But there are some assets that cannot be seen or touched, but they do have monetary value, and these are referred to as the Intangible ones. Examples of these include goodwill (company reputation), copyrights, patents, intellectual property, etc.

4. L - Liabilities

Any money owed by the business is known as a liability. Businesses borrow money or make purchase items/services on credit in their usual course of operations. Sometimes these credit arrangements are normally to be repaid within a year. These are called current/short-term liabilities. Examples of these are creditors, credit card balances, short-term loans, bank overdrafts, overdue expenses, etc.

On the other hand, there are times when the business might need more time to repay its debts and may opt for credit facilities that offer longer repayment periods, usually more than one year. These are called non-current/long-term liabilities. Examples are mortgages and long-term loans.

how-to-remember-the-six-typescategories-of-accounts-in-accounting-the-dealer-method

5. E - Equity

Equity (sometimes called owner's equity or shareholder's equity) is the total capital invested in the business by the owner(s) either at start-up or subsequent to that. But the buck does not stop there.

Any profits earned by the business that is not withdrawn by the owners or paid out to the owners are reinvested and become part of equity. After all, the profits belong to the owners, so if it is reinvested, it will become owner's equity.

Equity is also considered to be the net worth or net assets of the business since it can be calculated by subtracting the business's total liabilities from its total assets.

6. R - Revenue

Any income made by the business is classified as revenue. Income can be made from core operational activities such as selling goods/services but can also be earned in other ways.

Businesses often buy short-term investments on which they earn interest, or they might venture into other areas of earning income, such as renting an office space or earning commissions from third-party products. There are also one-off situations in which a business can earn money, like selling a fixed asset at a price that is higher than its current value.

Now that you know what the six categories are about, I hope you develop an appreciation for the respective acronym, DEALER. It will be an extremely useful tool on your accounting journey. Bon voyage!

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.