In Digit, every transaction is ultimately classified into one of five account categories. These categories form the basis of the balance sheet and profit & loss report.
1. Asset
An asset is something the business owns or is owed.
Examples:
- Bank accounts
- Money owed by customers (debtors)
- Buildings
- Vehicles
- Equipment
- Prepaid insurance
Think:
Assets = things of value to the business
Examples in insurance:
- Client money bank account
- Insurer trust account
- Commission receivable
2. Liability
A liability is something the business owes to someone else.
Examples:
- Loans
- Credit card balances
- Taxes owed
- Money owed to suppliers
- Client money owed to insurers
Think:
Liabilities = debts and obligations
Examples in insurance:
- Premiums due to insurers
- IPT payable
- Unpaid commission clawbacks
3. Equity
Equity is the value that belongs to the owners of the business.
Formula:
Assets − Liabilities = Equity
Think:
Equity = what's left after paying all debts
Examples:
- Share capital
- Retained profits
- Director's capital account
If a company has:
- Assets: £100,000
- Liabilities: £40,000
Then:
- Equity: £60,000
4. Income
Income is money the business earns.
Examples:
- Commission income
- Policy fees
- Brokerage fees
- Interest received
Think:
Income increases profit
Insurance example:
- Earned £50 commission on a policy.
- That's recorded as Income.
5. Expense
An expense is a cost incurred by the business.
Examples:
- Salaries
- Rent
- Software subscriptions
- Professional fees
- Marketing costs
Think:
Expenses reduce profit
Insurance example:
- Paying insurer software costs.
- Paying FCA fees.
- Paying office rent.
How they fit together
Balance Sheet
Shows what the business owns and owes:
| Category | Appears On |
|---|---|
| Asset | Balance Sheet |
| Liability | Balance Sheet |
| Equity | Balance Sheet |
Profit & Loss
Shows profitability:
| Category | Appears On |
|---|---|
| Income | Profit & Loss |
| Expense | Profit & Loss |
Broker example
Suppose a policy is sold:
Premium: £1,000
Commission: £150
The broker receives £1,000 from the client.
| Category | Entry |
|---|---|
| Asset | Bank +£1,000 |
| Liability | Due to insurer +£850 |
| Income | Commission income +£150 |
The broker holds £850 on behalf of the insurer and earns £150 as income.
That's why understanding whether an account is an asset, liability, income, expense, or equity is critical: it determines where transactions appear in financial reports and whether they affect the balance sheet, profit, or both.
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