ST. RAPHAEL COLLEGE OF BUSINESS AND ARTS INC.

Manuel L. Quezon Ave. Poblacion Uno Real, Quezon

Email: st.raphael_college@yahoo.com
Tel. No.: (042) 536-6428 | CP no.: 0961-0645-030

SENIOR HIGH SCHOOL

DEPARTMENT

Quarter 3 – Module 3:
THE ACCOUNTING EQUATION
Learning Competencies:
8. Discuss the major accounts
9. Cite examples of each type of accounts
10. Prepare chart of accounts

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Learning Objectives
This module was designed to help you demonstrate an understanding of the major
accounts in accounting. Identify examples of each type of accounts and be able to prepare
chart of accounts.

Review Last Lesson

Accounting equation has been illustrated in the last module. Introduction to

accounting course has been discussed in the first module. You have performed operations
that involves simple case with the use of accounting equation.

LEARNING COMPETENCY NO. 8

Discuss the major accounts

Lesson Proper

What Are the Five Major Accounts?

The five major accounts provide the structure for your chart of accounts, breaking it down
into separate categories of information. Several important financial reports are built
around the same five categories. The five major accounts you’ll use to create your chart of
accounts are:
Assets: Assets are resources owned by your business that can be converted into cash and
therefore have monetary value.
Liabilities: Liabilities are debts that your company owes to someone else.
Equity: The role of equity differs in the chart of accounts based on whether your business
is set up as a sole proprietorship, LLC or corporation. But the basic equation for
determining equity is a company’s assets minus its debts.
Revenue: Revenue is the amount of money your business brings in by selling its products
or services to clients.
Expenses: Expenses refer to the costs you incur in the process of running your business.
This would include your office rent, utilities and office supplies.

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LEARNING COMPETENCY NO. 9

Cite examples of each types of accounts
TYPICAL ACCOUNT TITLE USED

BALANCE SHEET

ASSETS
Assets are should be classified only into two: current assets and non – current
assets. Per Philippine Accounting Standards (PAS) No. 1, assets are classified as
current assets when it:
a. Is expected to be realized in, or is held for sale or consumption in, the normal
course of the enterprise’s operating cycle; or
b. Is held primarily for trading purpose or for the short – term and expected to be
realized within twelve months of the balance sheet date; or
c. Is cash or a cash equivalent asset which is not restricted in its use

All other assets should be classified as non – current assets. Operating cycle is
the time between the acquisition of materials entering into a process and its
realization in cash or an instrument that is readily convertible to cash.

Current Assets
Cash. Cash is any medium of exchange that a bank will accept for deposit at face
value. It includes coins, currency, checks, money orders, bank deposits and
drafts.
Cash Equivalents. Per PAS No. 7, these are short – term, highly liquid
investments that are readily convertible to known amount of cash and which are
subject to an insignificant risk of changes in value.
Notes Receivable. A note receivable is a written pledge that the customer will pay
the business a fixed amount on a certain date.
Accounts Receivable. These are claims against customers arising from sale of
services or goods on credit. This type of receivable offers less security than a
promissory note.
Inventories. Per PAS No. 2, these are assets which are (a) held for sale in the
ordinary course of business; (b) in the process of production for such sale; or (c) in
the form of materials or supplies to be consumed in the production process or in
the rendering of services
Prepaid Expenses. These are expenses paid for by the business in advance. It is
an asset because the business avoids having to pay cash in the future for a

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specific expense. These include insurance and rent. These prepaid items
represent future economic benefits – assets – until the time these start to
contribute to the earning process; these then, become expenses.

Non – Current Assets

Property, Plant and Equipment. Per PAS No. 16, these are tangible assets that
are held by an enterprise for use in the production or supply of goods or services,
or for rental to others, or for administrative purposes and which are expected to be
used during more than one period. Included are such items as land, building,
machinery and equipment, furniture and fixtures, motor vehicles and equipment.
Accumulated Depreciation. It is a contra account that contains the sum of the
periodic depreciation charges. The balance in this account is deducted from the
cost of the related asset – equipment or building – to obtain book value.
Intangible Assets. Per PAS No. 38, these are identifiable, non-monetary assets
without physical substance held for use in the production or supply of goods or
services, for rental to others, or for administrative purposes. These include
goodwill, patents, copyrights, licenses, franchises, trademarks, brand names,
secret processes, subscription lists and non- competition agreements.

LIABILITIES
Per PAS No. 1, a liability should be classified as a current liability when it:
a. Is expected to be settled in the normal course of the enterprise’s operating cycle; or
b. Is due to be settled within twelve months of the balance sheet date.

All other liabilities should be classified as non – current liabilities

Current Liabilities
Accounts Payable. This amount represents the reverse relationship of the
accounts receivable. By accepting the goods or services, the buyer agrees to pay
for them in the near future.
Notes Payable. A note payable is like a note receivable but in a reverse sense. In
the case of a note payable, the business entity is the maker of note; that is, the
business entity is the party who promises to pay the other party a specified
amount of money on a specified future date.
Accrued liabilities. Amounts owed to others for unpaid expenses. This account
includes salaries payable, utilities payable, interest payable and taxes payable.
Unearned Revenues. When the business entity receives payment before
providing its customers with goods or services, the amounts received are recorded
in the unearned revenue account (liability method). When the goods or services
are provided to the customer, the unearned revenue is reduced and income is
recognized.
Current Portion of Long – term Debt. These are portions of mortgage notes,
bonds and other long – term indebtedness which are to be paid within one year
from the balance sheet date.

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Non – Current Liabilities

Mortgage Payable. This account records long – term debt of the business entity
for which the business entity has pledged certain assets as security to the
creditor. In the event that the debt payments are not made, the creditor can
foreclose or cause the mortgaged asset to be sold to enable the entity to settle the
claims.

Bonds Payable. Business organizations often obtain substantial sums of money

from lenders to finance the acquisition of equipment and other needed assets.
They obtain these funds by issuing bonds. The bonds is a contract between the
issuer and the lender specifying the terms of repayment and the interest to be
charged.

OWNER’S EQUITY

Capital. This account is used to record the original and additional investments of
the owner of the business entity. It is increased by the amount of profit earned
during the year or is decreased by a loss. Cash or other assets that the owner
may withdraw from the business ultimately reduce it. This account title bears the
name of the owner.
Withdrawals. When the owner of a business entity withdraws cash or other
assets, such as are recorded in the drawing account rather than directly reducing
the owner’s equity account.
Income Summary. It is temporary account used at the end of the accounting
period to close income and expenses. This account shows the profit or loss for the
period before closing to the capital account.

INCOME STATEMENT
INCOME
Service Income. Revenues earned by performing services for a customer or client;
for example, accounting services by a CPA firm, laundry services by a laundry
shop.
Sales. Revenues earned as a result of sale of merchandise; for example, sale of
building materials by a construction supplies firm.

EXPENSES
Cost of sales. The cost incurred to purchase or to produce the product sold to
customers during the period; also called cost of goods sold.
Salaries and Wages Expense. Includes all payments as a result of an employer
– employee relationship such as salaries or wages, 13 th month pay, cost of living
allowances and other related benefits.

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Telecommunications, Electricity, Fuel and Water Expenses. Expenses related

to use of telecommunications facilities, consumption of electricity, fuel and water.
Rent Expense. Expense for space, equipment or other asset rentals.
Supplies expense. Expense of using supplies (e.g. office supplies) in the conduct
of daily business.
Insurance Expense. Portion of premiums paid on insurance coverage (e.g. on
motor vehicle, health, life, fire, typhoon or flood) which has expired.
Depreciation Expense. The portion of the cost of a tangible asset (e.g. buildings
and equipment) allocated or charged as expense during an accounting period.
Uncollectible Accounts Expense. The amount of receivables estimated to be
doubtful of collection and charged as expense during an accounting period.
Interest Expense. An expense related to use of borrowed funds.

Lesson Proper

LEARNING COMPETENCY NO. 10

Prepare chart of accounts

Lesson Proper

What is chart of accounts?

Chart of Accounts – these are the listing of the account title use by a particular
entity in the course of their business operation.
A chart of accounts is a small business accounting tool to organize the important
accounts that help create your business’s financial statements. Your chart of
accounts is a useful document that lets you present all the financial information
about your business in one place, giving you a clear picture of your company’s
financial health.
Account No. – The Number assigned for each account for easy reference. The
business entity may assign their Account No. based on the company practices.
Account titles are listed based on their normal or kinds of business operation.
Small businesses use the chart of accounts to organize all the complex details of
their company finances into an accessible format. It’s the first step you’ll take to

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set up your business’s accounting system. The chart of accounts clearly separates
your earnings, expenditures, assets and liabilities to give an accurate overview of
how your business is performing financially.

The chart of accounts organizes your finances into numbered account categories.
Most businesses follow this consistent, commonly accepted account numbering
system:

1000 – 1900: Assets

2000 – 2900: Liabilities
3000 – 3900: Equity
4000 – 4900: Revenue
5000 – 5900: Expenses
Although it’s not necessary that you follow that format, businesses generally follow
the same numbering system for the chart of accounts because it makes it easier
for an accountant or bookkeeper to step in and translate the information into
standard financial reports. If you’ve worked on a general ledger before, you’ll
notice the accounts for the ledger are the same as the ones found in a chart of
accounts.

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Activity/ Exercise

Preparation of the chart of accounts:

Direction: Complete the chart of accounts by assigning an account number in
every account title. Write it under account number column.

C. Rana Repair Shop

Chart of Accounts

Account No. Account Title

Cash
Account Receivable-R. Gil
Account Receivable- M. Soriano
Repair Tools
Repair Supplies
Furniture’s and Fixtures
Service Truck
Accounts Payable- Cruz Furniture
Notes Payable
C. Rana, Capital
C. Rana, Personal
Service Income
Advertising Expense
Salaries and Wages
Utilities Expense
Rent Expense

Challenge
Fundamentals of Accountancy, Business and Management 1
Grade 11 – MODULE NO. 3

Learner Name: _______________________________________ DATE: ___________

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Grade & Section: _______________________________________ SCORE: __________

Part I – Multiple Choice

Direction: Encircle the letter of the correct answer.
1. The accounting equation
a. Is used to determine the amount of liabilities owed.
b. Is used to determine the amount of income earned during the period.
c. Shows the claims on the entity’s assets by both the creditors and owner.
d. Shows the claim on the owner’s equity by the creditor
2. Another way of stating the accounting equation is
a. Assets + liabilities = Owner’s equity
b. Assets = liabilities – owner’s equity
c. Assets – liabilities = owner’s equity
d. Assets = owner’s equity – liabilities
3. In the accounting equation, an increase in asset can be associated with
a. An increase in a liability
b. A decrease in owner’s equity
c. A decrease in a liability
d. An increase in another asset
4. The component of the balance sheet equation are
a. Assets, income and owner’s equity
b. Income, expenses and profit
c. Assets, liabilities and owner’s equity
d. Investment, withdrawals and profit
5. The following can be found in an income statement except
a. Assets c. Income
b. Expenses d. Profit or loss
6. A current asset which includes coins, currencies and bank deposit is called
a. Accounts receivable c. Cash equivalents
b. Cash d. Notes receivable
7. Which of the following is not subject to depreciation?
a. Building c. Land
b. Equipment d. Machinery
8. This account shows the profit or loss for the period before closing to the
capital account.
a. Income c. Drawing
b. Capital d. Income Summary
9. The amount of receivables estimated to be doubtful of collection and
charged as expense during an accounting period.
a. Interest c. Interest payable
b. Doubtful accounts
d. Return and allowances
10. Also called cost of goods sold.
a. Cost of sales
b. Income
c. Sales return
d. Merchandise inventory

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Answer Key

Preparation of the chart of accounts:

C. Rana Repair Shop

Chart of Accounts

Account No. Account Title

111 Cash
112 Account Receivable-R. Gil
Account Receivable- M.
113 Soriano
114 Repair Tools
115 Repair Supplies
116 Furniture’s and Fixtures
117 Service Truck
Accounts Payable- Cruz
211 Furniture
212 Notes Payable
311 C. Rana, Capital
312 C. Rana, Personal
411 Service Income
511 Advertising Expense
512 Salaries and Wages
513 Utilities Expense
514 Rent Expense

References

 Ballada, W. Accounting Fundamentals Made Easy; DomDane Publishers & Made

Easy Books, 2019
 https://www.freshbooks.com/hub/accounting/chart-of-accounts
 Arganda, A.M. Accounting Principles 1 Textbook/Workbook;
 National Bookstore, 2007

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