DEFINITIONS, CLASSIFICATIONS AND EXAMPLES OF ACCOUNTS:

Accounting uses several account titles to describe economic transactions and events.

REAL ACCOUNTS – are ASSETS, LIABILITIES, and OWNER’S EQUITY. Real accounts are reported in the
SFP (Statement of Financial Position). They are not closed at the end of the accounting period.

THE ASSET ACCOUNTS

Assets are resources or things of value owned by an enterprise. Some of them have physical form (such
as cash and inventory), but others have no physical form (such as patents and copyrights). For as long as
future economic benefits are expected from them to flow to the entity and if they are controlled by the
entity, they are assets.
Generally, they are recorded in the books or accounts with a normal debit balance. The asset accounts
are classified into current and noncurrent assets.

Current Assets – An asset should be classified as a current asset when any of the following criteria are
met:
1. It is cash or cash equivalent which is not restricted for current use.
2. It is expected to be realized, or is held for sale or consumption in the normal course of the
enterprise’s operating cycle.
3. It is held primarily for trading purposes of for the short- term, and it is expected to be realized
within 12 months of the SFP date.
 The operating cycle of an enterprise is the time between the acquisition of materials entering
into a process and its realization in cash or an instrument that is readily convertible into cash.
The following are some of the current assets that are commonly used:
 Cash – any item on hand with monetary value that a bank will accept for deposit and all
amounts currently on deposit with the bank in the name of the business. This includes coins and
currencies, personal checks, money orders, traveler’s checks made payable to the business and
bank drafts. Also included are any funds that are currently on deposit at a bank and readily
available as checking and savings account.
 Accounts Receivable – The amounts collectible on open accounts of the customers. These
represent debtor’s oral promise to pay a certain amount to the business and the right of the
business to collect that certain amount in peso. Examples are receivables from sales of goods or
services.
 Notes Receivable – A promissory note received by the business from its debtors and/or
customers. A promissory note is a written promise to pay a certain amount on specified or
determinable date.
 Accrued interest Receivable- The interest earned on note receivable but not yet received in
cash.
 Inventories – assets held for sale in the normal operation of the business, in the process of
production for sale, or in the form of material or supplies to be consumed in the production
process or in the rendering of services. Examples are merchandise inventory, work-in process
inventory, and raw materials inventory.
 Prepaid supplies – these are various materials which remains unused at the end of the
accounting period. Examples are unused coupon bonds, ink, ballpen, and janitorial supplies.
Other examples are: marketable securities, prepaid expenses, investments that are intended to be sold
or short term investments.
Noncurrent Assets – These are assets that do not meet the criteria of a current asset. Generally, they
include tangible, intangible, operating and financial assets of a long-term nature.
 Land – The site owned by the business on which the business building is constructed. This is not
subject to depreciation.
 Building – The structure owned by the business used in the operation of the business.
 Furniture and Fixture – Long –lived items used by the business including store furnishings such
as showcases, counters, containers, display racks, as well as furniture used for office purposes
such as desks, chairs and cabinets.
 Equipment – Consists of what generally might be called the machinery used in a business such
as computers, delivery equipment of any sort, or machinery used in conveying, packing, sorting
or altering the commodities handled.
 Other examples of noncurrent assets are: long term investments such as interest, royalties,
dividends and rentals, franchise, patent and copyright.
CONTRA ASSET/VALUATION ACCOUNTS:
 Allowance for Doubtful Accounts or Allowance for Bad Debts or Allowance for Uncollectible
Accounts – refers to an amount estimated uncollectible on receivable in compliance with the
principle of conservatism. It is a deduction from Accounts Receivable.
 Accumulated Depreciation – The aggregate periodic costs of using a depreciable plant asset. It
is a deduction from a noncurrent asset except land.

THE LIABILITY ACCOUNTS

LIABILITIES are present obligations to pay cash or cash equivalents by an entity. In other words, they
represent claims against the assets of the business. Liability accounts have a normal credit balance. They
are classified into current and noncurrent liabilities.

Current Liability - is one that meets the following criteria:

1. It is expected to be settled in the normal course of the business’s operating cycle.

2. It is due to be settled within 12 months of the SFP date.
Examples of Current Liabilities:
 Accounts Payable – An obligation or debt to creditors for money borrowed or merchandise and
other assets bought on credit. Examples are obligations arising from purchases on account.
 Notes Payable – A promissory note issued by the business to its creditors for money borrowed
or merchandise and other assets bought on credit.
 Accrued Interest payable - The interest incurred in the current period but not yet paid.
 SSS premium payable
 Withholding tax payable
Noncurrent Liability – Is one that does not meet the criteria of a current liability. Generally, it
comprises the portion payable beyond one year of a long –term liability.
THE OWNER’S EQUITY ACCOUNTS

Owner’s Equity – The residual amount after deducting liabilities form assets. It comprises the capital
contribution and withdrawals by the owner. It is increased by capital contribution of the owner and net
income of the business, and decreased by the owner’s withdrawals and net losses of the business.

Owner’s equity is described as owner’s capital (sole proprietorship), partners’ capital (partnership)
and shareholders’ equity (corporation). These accounts have normal credit balances.

 Drawing – is a temporary account used to record initially the amount taken by the owner from
the business. This is closed to the capital account of the owner at the end of the accounting
period.

NOMINAL ACCOUNTS

Nominal Accounts are those that comprise the elements of the Statement of Comprehensive Income.
– The Revenue and Expense accounts. These accounts are temporary because they are closed or put
to zero balance at the end of accounting period.

THE REVENUE ACCOUNTS

Revenue represents the earnings of the business from sales of goods or service rendered. Revenue
accounts have a normal credit balance. Below are some common revenue accounts.

 Sales – an account used to summarize sale of goods of a trade or a merchandising business. This
includes cash sales and sales on account.
 Service Income – the earnings derived from service rendered by a servicing business to its
customers. This includes cash and on account services.
 Professional Fees – The earnings derived from services rendered by a professional or
professional servicing firm which could be in cash or in collectibles to its clients.
 Interest income – The earnings representing the time value of money derived from the
promissory notes received by the business, whether in cash or collectibles in the future.
 Rent Income – The income earned from allowing others to use the property or facility of the
business.
 Gain on Sale of Other Assets – The income derived from the sales of assets used in the business
operation. There is gain on sale if the proceeds exceed the book value or cost of the disposed
asset. Examples are gain on sale of equipment, gain on sale of investments, gain on sale of land,
etc.
THE EXPENSE ACCOUNTS
Expenses are costs incurred in conducting the business activities. Expense accounts have normal debit
balances. Some common expense accounts are as follows:
 Cost of Sales – The value of merchandise sold.
 Supplies Expense – The amount of supplies consumed or used by the business during the
period. Examples: used office papers, inks, ballpens,l etc…
 Salaries and Wages – The amount paid to services rendered by the employees in the operation
of the business.
 Insurance Expense – The amount of insurance policy incurred during current period. Examples:
premiums of building insurance, life insurance, plant insurance, etc…
  Taxes and Licenses Expense – The cost of local as well as national taxes that are incurred and
required to be paid in connection with the conduct of business. Examples: cost to acquire
mayor’s permit, registration cost of the business, percentage tax on sales, etc….

Estimated Expenses:
 Doubtful Accounts Expense – The estimated amount of losses from uncollectible accounts
arising from credit sales of the current period. This is also called bad debts expense or
uncollectible account expense.
 Depreciation Expense – Represents the current periodic cost for using depreciable plant assets.
In accordance with the systematic cost allocation principle, the acquisition cost of depreciable
plant asset should be allocated as expense over its useful life.