LEARNING MODULE #5

FINANCIAL ACCOUNTING AND REPORTING

Learning Objectives
1. State the five major accounts
2. Give examples of each type of account.

The Account

An account is the basic storage of information in accounting. It is a record of the

increases and decreases in a specific item of assets, liability, equity, income or expense.

An account may be depicted through a “T-account.” A “T-account” is called

as such because it resembles the letter “T”. A “T-account” has three parts, namely:

1. Account title – describe is describes the specific item of asset, liability, equity,
income or expense.
2. Debit side – the left side of the account
3. Credit side – the right side of the accou
This is the “Account title”

Cash
The term “credit” (Cr) simply refers to the right side of the account. It is sometimes referred to as the “v
DebitCredit
500
1,000 700
1 Jan
3 Jan Balance 800 4 Jan
The difference between the total debits and credit in the account represents the balance of the account (500 + 1,000
If the total debits exceed total credits, the account has a debit balance. If total credits exceed total debits, the accoun

ply refers to the left side of the account. It is sometimes referred to as the “value received.”
 The Five Major Accounts
The five major accounts, also called the elements of financial statements, are
actually the items in the expanded accounting equation discussed on Learning
Module 4.

To understand more, let’s read and analyzed, again!

1. ASSETS are the resources you control that have resulted from past events and can
provide you with future economic benefits.

2. LIABILITIES are your present obligations that have from past events and can require you
to give up resources when settling them.

3. EQUITY is computed as assets minus liabilities

4. INCOME is represented by increases in economic benefits during the period in the form
of inflows or enhancements of assets or decreases of liabilities that result in increases in
equity, other than those relating to investments by the business owners.

Income includes both revenue and gain

a. Revenue arises in the course of ordinary activities of a business and is referred to

by a variety of different names including sales, fees, interest, dividends, royalties and rent.
b. Gains represent other items that meet the definition of income and may or may
not arise in the course of the ordinary activities of an entity.

Example 1: Your business is selling barbeque. The income derives from

selling barbeque is your main business (ordinary business activity).

One day, you decided to replace your old beach umbrella. The umbrella has a
carrying amount* of ₱2,000 in your accounting books. You were able to sell the old umbrella
for ₱2,200. The difference between the selling price of ₱2,200 and the carrying amount of
₱2,000, represent gain ₱2,200 – ₱2,000 = ₱200 gain). This is because selling of umbrella is
your main business (not your ordinary business activity).
*Carrying amount refers to the net amount by which an item is carried (i.e. recorded) in the accounting books.

5. EXPENSES are decreases in economic benefits during the period in the form of outflows or
depletions of assets or increases of liabilities that result in decreases in equity, other than
those relating to distributions to the business owners.
 Expenses include both expenses and losses.
a. Expenses arise in the course of the ordinary activities of a business.
b. Losses represent other items that meet the definition of expenses and may or
may not, arise in the course of the ordinary activities of the entity.

Example 2: If your barbeque business (see example 1 above), the cost of

barbeque you have sold is an expense. If you were able to sell the old umbrella with
carrying amount of ₱2,000 for ₱1,600, the difference now of ₱400 represents a loss
(₱1,600 – ₱2,000 = ₱400 loss).

Notes:
 If selling price is greater than carrying amount, the difference is a gain.
 If the selling price is less than carrying amount, the difference is loss.

Classification of the Five Major Accounts

1. What are the contents of Balance Sheet Accounts?

2. What are the contents Income Statements Accounts?

Answer: 1. Balance Sheet Accounts are composed of assets, liabilities and Equity.
2. Income Statements Accounts are also composed of Income and
expenses.

The balance sheet (or the statement of financial position) is one of the
components of a complete set of financial statements. The balance sheet shows the
financial position of a business.

 The income statement (or the statement of profit or loss) is a sub-component of the
statement of comprehensive income, which is also one of the components of
complete set of financial statements. The income statement shows the profit or loss
of a business.

Are you good? If you have questions contact your teacher, but if you think you
are ready for the next lesson, move now to the next topic.
Preparing a Chart of Accounts
What is chart of account?

Answer: The chart of account is a list of all accounts used by the business.

Answer: Actually, you may classify transaction on account as presented below ( but
remember the account title and number may differ as declared by the company).

Chart of Accounts
Balance Sheet Accounts Income Statement Accounts
Account ASSETS Account No. INCOME
No.
110 Cash 410 Service Fees
120 Accounts receivable 420 Sales
125 Allowance for bad debts 430 Interest income
130 Notes receivable 440 Gains
140 Inventory EXPENSES
150 Prepaid supplies 510 Cost of sales
155 Prepaid rent 515 Freight-out
160 Prepaid insurance 520 Salaries expense
170 Land 525 Rent expense
180 Building 530 Utilities expense
185 Accumulated Depreciation- 535 Supplies expense
Bldg.
190 Equipment 540 Bad debt expense depreciation
195 Accumulated Depreciation – 545 Expense
equipment
LIABILITIEs 550 Advertising expense
210 Accounts payable 555 Insurance expense
220 Notes payable 560 Taxes and licenses
230 Interest payable 565 Transportation and travel expense
240 Salaries payable 570 Interest expense
250 Utilities payable 575 Miscellaneous expense
260 Unearned income 580 Losses
EQUITY
310 Owner’s capital
320 Owner’s drawing

Remember that account numbers are assigned to the accounts to facilitate

recording, cross referencing, and retrieval of information. Although there is no
standard way of assigning account numbers, account numbers should be assigned
in a manner that the accounts are categorized locally.
 Each business shall formulate a chart of accounts that best suits its
needs. Large corporations may have thousands of accounts and have more
digits on their account numbers. Smaller companies may have lower accounts
increases, the digits in the account number of accounts.
But how it was arranged? It was arranged on:

1. The first digit in the 3 – digit numbering refers to the major types of accounts
Major Assigned
types of number
Accounts
Assets 1
Liabilities 2
Equity 3
Income 4
Expenses 5

Thus, in the chart of accounts, the 3 – digit numberings of all assets start
with 1; the 3 – digit numberings of all liabilities start with 2; etc.
110 Cash

The first digit signifies that this account is an asset account

2. The second digit in the 3 – digit numbering refers to the account titles and the
sequence on how they are listed in the chart of accounts.
Thus, in the chart of accounts, the second digit in the 3 –digit numbering
of “Cash” is 1 because it is the first asset account listed in the chart; the second
digit in the 3 – digit numbering of :Accounts receivable” is 2 because it is the
second asset account listed in the chart; etc.

110 Cash

120 Accounts receivable

The second digits refer to specific account titles and the sequence on how they are listed in the chart of accoun
 3. The third digit in the 3 – digit numbering, if not zero, signifies that the account is a
contra account or an adjunct accounts (*) to a related account.
180 Building
185 Accumulated depreciation – bldg.
(*)
Contra and adjunct accounts are discussed in the next module.
The third digit signifies that this account, “Accumulated
depreciation – Bldg.” is a contra – account to the “Building”
account

To promote comparability, a business shall use account titles that

conform to the PFRSs (Philippine Financial Reporting Standards) and industry
practices. Furthermore, regulated businesses should have charts of accounts
and/or accounts numbering system that conform to the relevant regulations. For
example:

a. The chart of accounts of a bank should conform to the chart of

accounts endorsed by the Bangko Sentral ng Pilipinas (BSP);
b. The chart of accounts of a cooperative should conform to the chart of
accounts endorsed by Cooperative Development Authority (CDA); and
c. The chart of accounts and the account numbering system of a
national government agency must conform to the “Philippine Revised Chart of
Accounts for National Government Agencies.”

Common Account Titles

The following are the common account titles and their description

BALANCE SHEET ACCOUNTS

ASSETS
 Cash- includes money or its equivalent that is readily available for unrestricted use,
e.g., cash on hand and cash in bank.
 Accounts receivable- receivables supported by oral or informal promise to pay.
 Allowance for bad debts- the aggregate of estimated losses from uncollectible
accounts receivable. Another term is “allowance for doubtful account.”
 Notes receivable- receivables supported by written or formal promise to pay in the
form of promissory note.
 Inventory- represents the goods that are held for sale by the business. For
 manufacturing business, inventory also includes goods undergoing the process f
production and raw materials that will be consumed in the production process.
 Prepaid supplies- represents the cost of unused office and other supplies.
 Prepaid rent- rent paid in advance
 Prepaid insurance- cost of insurance paid in advance.
 Land- the lot on which the building of the business has been constructed or a
vacant lot which is to be used as future plant site. Land is not depreciable.
 Building- the structure owned by the business for use in the operations.
 Accumulated depreciation-building- the total amount of depreciation expenses
recognized since the building was acquired and made available for use.
 Equipment – consists of various assets such as:
a. Machineries and other factory equipment
b. Transportation equipment, e.g., vehicles, delivery truck
c. Office equipment, e.g., desk, cabinet, chairs
d. Computer equipment, e.g., server, personal computers, laptops
e. Furniture and fixtures, e.g., desks, cabinets, movable partitions
 Accumulated depreciation- equipment- the total amount of depreciation expenses
recognized since the equipment was acquired and made available for use.

Collectively, land, building, and equipment are referred to as “Property,

plant and equipment”, “Capital assets” or “Fixed assets”

LIABILITIES
 Accounts payable – obligations supported by oral or informal promises to pay by
the debtor.
 Notes payable – obligations supported by written promise or formal promises to
pay by the debtor in the form of promissory notes.

Accounts payable and accounts receivable are opposites. Meaning, if I have an

accounts receivable from you, it means that you have an accounts payable to me. This is
also true for notes payable and notes receivable..
“Accounts” Vs. “Notes”: you go to a sari-sari store and tell the owner, “Aling Maria,
pautang nga po ng isang lata ng sardinas. Pakilista” in here, aling Maria has an accounts
receivable from you. On the other hand, you have an account payable to aling Maria. It is
an “account” rather than a “note” because your promise to pay is made orally or
informally (i.e pakilista)
Another example: you go to a bank to obtain a loan. The bank requires you to fill up
a formal and pre-printed form called promissory note. The promissory note will be
notarized by a lawyer and corresponding documentary stamp taxes will be paid. In here,
the bank has a note receivable from you. On the other hand, you have a note payable to
the bank. This time, it is a “note” rather than “account” because your promise to pay is
made formally in writing.
 Interest Payable – interest incurred but not yet paid. Interest payable arises from
interest bearing liabilities. For example, you will incur interest on your bank loan.
 Salaries payable – salaries already earned by employees but not yet paid by the
business.
 Utilities payable – utilities (e.g., electricity, water, telephone, internet, cable TV,
etc.) already used but not yet paid.
 Unearned income – items related to income that were collected in advance before
they are earned. After the earning process is completed, these items are transferred
to income.

Note:Hints:
the word “receivable” cannotes an asset while the word “payable” cannotes a liability
the word “prepaid” cannotes an asset while the word “unearned” cannotes a liability

EQUITY (Capital, Net assets or Net worth)

 Owner’s capital ( or Owner’s equity) – the residual amount after deducting liabilities
from assets.

The owner’s Capital account is

INCREASED by: DECREASED by:

Investments or contributions by the owner Withdrawals or distributions to the
owners.
Income or Profit earned by the business Expenses or Loss incurred by the business

 Owner’s drawings – this account is used to record temporary withdrawals of the owner
during the period. At the end of accounting period, any balance of this account is closed to the
owner’s capital account.
INCOME STATEMENT ACCOUNTS

INCOME

 Service fees- revenues earned from rendering services (e.g. services of spa, services of
beauty salon)

 Sales – revenues earned from sale of goods (e.g. sale of barbeque, sale of souvenir
items etc.)

 Interest income – revenues earned from the issuance of interest bearing receivables

 Gains – income earned from sale of assets (except inventory) or from enhancements of
assets or decreases in liabilities that are not classified as revenue.

EXPENSES

 Cost of sales (Cost of goods sold) – represents the value of inventories that have been
sold during the accounting period.

 Freight-out – represents the sellers’ cost of delivering goods to customers. Other terms
for freight-out are “delivery expense,” “transportation-out” and “carriage outwards”

 Salaries expense - represents the salaries earned by the employees for the services
they have rendered during the accounting period

 Rent expense – represents the rentals that have been used up during the accounting
period.

 Utilities expense – represents the cost of utilities (e.g., electricity, water, telephone,
internet, etc.) that have been used during the accounting period.

a business can also have a separate account for each type of utility, e.g.,
“Electricity Expense” “Water expense” “Technology and Communication expense”

 Supplies expense- represents the cost of supplies that have been used during the period

 Bad debt expense- the amount of estimated losses from uncollectible accounts
receivable during the period. Other term is “doubtful account expense”.

 Depreciation expense- the cost of a depreciable asset (e.g., building or equipment) that
has been allocated to the current accounting period.
 Advertising expense- represents the cost of promotional or marketing activities during
the period.

 Insurance expense- represents the cost of insurance pertaining to the current

accounting period.

 Taxes and Licenses- represents the cost of business and local taxes required by the
government for the conduct of business (e.g., mayor’s permit, community taxes, etc.)

 Transportation and travel expense

Transportation expenses represents the necessary and ordinary cost of

employees getting from one workplace to another which are reimbursable by the
business, e.g., reimbursable taxi fares of employees running some errands and those
who are working on late shifts.

Travel expenses represent costs incurred when travelling away from home on
business trips, e.g., out-of-town travel cost of employees sent to seminars.

 Interest expense- represents the cost of borrowing money. It is the price that a lender
charges a borrower for the use of the lender’s money.

 Miscellaneous expense- represents various small expenditure which do not warrant

separate presentation