Acctg.

Ed 1 - Financial Accounting & Reporting Unit 2 Module 4 Types of Major Accounts

Unit 2

General Concepts and Principles of Accounting

Module 4

TYPES OF MAJOR ACCOUNTS

Acctg. Ed 1 - Financial Accounting & Reporting Unit 2 Module 4 Types of Major Accounts

Unit 2 – Application of Accounting Concepts & Principles

Unit 2 applies accounting concepts and principles into real business transactions.
It will cover deeper discussion on accounting equation, types of major accounts, books
of accounts and double entry system, business transactions and their analysis, posting
to ledger and adjusting entries.

Module 4 – Types of Major Accounts

This module covers topics on five major accounts and examples of each major
type of account.

Objectives

At the end of the module, you should be able to:

1. Identify the five major accounts

2. Provide example of each major type of account

Account
is the basic storage of information in accounting. It is a record of the increases and
decreases in a specific item of asset, liability, capital(equity), revenue(income) or
expense.

T-account
is a device form where the increase and decrease in a specific item is recorded.

Parts of T-account
1. Account title – describes the specific item of asset, liability, capital, revenue or
expense
2. Debit side – the left side of the account
3. Credit side – the right side of the account

The FIVE Major Accounts (Elements of the financial statements)

1. Assets
are the economic 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 resulted from past events and can require you to
give up economic resources when settling them.

3. Capital (Equity)
is simply assets minus liabilities. It is also known as equity, net assets or networth
 Acctg. Ed 1 - Financial Accounting & Reporting Unit 2 Module 4 Types of Major Accounts

4. Revenue (Income)
is increases in economic benefits during the period in the form of increase in assets, or
decreases in liabilities, that result in increases in equity, excluding those relating to
investments by the business owner.

Income includes both revenue and gains.

a. Revenue arises in the course of the ordinary activities of a business, e.g., sales
and service fees.
b. Gains represent other items that meet the definition of income and may or may
not arise in the course of the ordinary activities.

5. Expenses
are decreases in economic benefits during the period in the form of decreases in
assets, or increases in liabilities, that result in decreases in equity, excluding those
relating to distributions to the business owner.

Expenses include both expenses and losses

a. Expenses arise in the course of the ordinary activities of the business.
b. Losses represent other items that meet the definition of expenses and may or
may not arise in the course of the ordinary activity of the entity.

Classification of the Five Major Accounts

The five major accounts are classified according to the financial statement where they
appear:
BALANCE SHEET ACCOUNTS INCOME STATEMENT
ACCOUNTS
1. ASSETS 1. REVENUE (INCOME)
2. LIABILITIES 2. EXPENSES
3. CAPITAL (EQUITY)

Chart of Accounts
A Chart of accounts is a list of all the accounts used by a business.

Chart of Accounts
BALANCE SHEET ACCOUNTS INCOME STATEMENT ACCOUNTS
Account Account
No. No.
ASSETS REVENUE (INCOME)
110 Cash 410 Service fee
120 Accounts Receivable 420 Sales
125 Allowance for bad debt 430 Interest Income
130 Notes Receivable 440 Gains
140 Inventory
150 Prepaid Supplies EXPENSES
Acctg. Ed 1 - Financial Accounting & Reporting Unit 2 Module 4 Types of Major Accounts

155 Prepaid Rent 510 Cost of Sales

160 Prepaid Insurance 515 Freight-out
170 Land 520 Salaries expense
180 Building 525 Rent expense
185 Accumulated depreciation-Building 530 Utilities expense
190 Equipment 535 Supplies expense
195 Accumulated depreciation-Equipment 540 Bad debt expense
545 Depreciation expense
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

CAPITAL (EQUITY)
310 Owner’s capital
320 Owner’s drawings

The account titles in the chart of accounts shown are number in the following manner:

1. The first digit in the 3-digit numbering refers to the major types of accounts:

Major types of accounts Assigned number

ASSETS 1
LIABILITIES 2
CAPITAL (EQUITY) 3
REVENUE (INCOME) 4
EXPENSES 5

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

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 accounts
Acctg. Ed 1 - Financial Accounting & Reporting Unit 2 Module 4 Types of Major Accounts

3. The third digit in the 3-digit numbering, if not zero, signifies that the account is a
contra account or an adjunct account to a related account.

180 Building
185 Accumulated depreciation – Bldg.

The second digit signifies that this account, “Accumulated

depreciation – Bldg.,” is a contra-account to the “Building”
Common Account Titles account.

BALANCE SHEET ACCOUNTS

ASSETS
 Cash – includes money or its equivalent that is readily available for unrestricted use,
e.g., cash on hand and cash I bank.
 Accounts receivable – receivables supported by oral or informal promises to pay.
 Allowance for bad debts – the aggregate amount of estimated losses from
uncollectible accounts receivable. Another term is “allowance for doubtful accounts.”
 Notes receivable – receivable supported by written or formal promises to pay in the
form of promissory notes.
 Inventory – represents the goods that are held for sale by a business. For a
manufacturing business, inventory also includes goods undergoing the process of
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 a business for use in its operations.
 Accumulated depreciation – building – the total amount of depreciation 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 trucks
c. Office equipment, e.g., desks, cabinets, chairs
d. Computer equipment, e.g., server, personal computers, laptops
e. Furniture and fixtures, e.g., desks, cabinets, movable partitions
Acctg. Ed 1 - Financial Accounting & Reporting Unit 2 Module 4 Types of Major Accounts

 Accumulated depreciation – equipment – the total amount of depreciation

expenses recognized since the equipment was acquired and made available for use.

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

EQUITY (Capital, Net Assets or Net worth)

 Owner’s capital (or Owner’s equity) – the residual amount after deducting
liabilities from assets.
 Owner’s drawings – this account is used to record the temporary withdrawals of the
owner during the period. At the end of the accounting period, any balance in this
account is closed to the “Owner’s capital” account.

INCOME STATEMENT ACCOUNTS

INCOME (REVENUE)
 Service fees – revenues earned from rendering services (e.g., services of a spa,
services of a beauty salon, etc.).
 Sales – revenues earned from the sale of goods (e.g., sale of barbecue, sale of
souvenir items, etc.).
 Interest income – revenues earned from the issuance of interest-bearing
receivables.
 Gains – income earned from the sale of assets (except inventory) or from
enhancements of assets or decreases in liabilities that are not classified as revenue.

EXPENSES
 Cost of sales (or Cost of goods sold) – represents the value of inventories that
have been sold during the accounting period.
Acctg. Ed 1 - Financial Accounting & Reporting Unit 2 Module 4 Types of Major Accounts

 Freight-out – represents the sellers’ costs of delivering goods to customers. Other

terms for freight-out are “delivery expenses,” “transportation-out,” and “carriage
outwards.”
 Salaries expense – represents the salaries earned by 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, cable TV, etc.) that have been used during the accounting period.
 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 accounts expense.”
 Depreciation expense – the portion of 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, other percentage
taxes, community taxes). For corporations and partnerships, income taxes are
recorded in a separated account called “Income tax expense.”
 Transportation and travel expense.
- Transportation expenses represent the necessary and ordinary cost of
employees getting from one workplace to another which are reimbursable by the
business
- Travel expenses represents the costs incurred when travelling on business trips,
e.g., out-of-town travel costs 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. Other terms for interest
expense are finance costs and borrowing costs.
- Interest expense and interest income are opposites. For example, you will incur
interest expenses on the money you borrowed from Mr. Bombay. On the other
hand, Mr. Bombay will earn interest income.
 Miscellaneous expense – represents various small expenditures which do not
warrant separate presentation.
 Losses -expense which may or may not arise from the ordinary course of business
activities. Losses may arise from:
Acctg. Ed 1 - Financial Accounting & Reporting Unit 2 Module 4 Types of Major Accounts

a. Sale of assets, other than inventory, at a sale price that is less than the carrying
amount.
b. Decreases in the value of assets due to destruction, damage, obsolescence and
other changes in values caused by market factors, e.g., loss on fire, earthquake,
storm, and other calamities, decrease in the value of foreign currencies held due
to changes in exchange rates.
Drills on Account Titles

ASSET ACCOUNTS

Accounts receivable
 A customer bought barbecue worth P500 from your barbecue business. He told you
that he will pay for it next week.
 The P500 collectible from the customer is recorded as accounts receivable.

Allowance for bad debts (Allowance for doubtful accounts)

 The customer with the P500 account receivable is broke. You have estimated that
you can only collect P420 from him.
 The P80 (500 – 420) uncollectible account is recorded as bad debts expense and
accumulated in the allowance for bad debts account.

Notes receivable
 Your friend borrowed P1,000 from your barbecue business. You required from him a
written promissory note to repay the money within 30 days plus 1% monthly interest.
 The P1,000 collectible from your friend is recorded as notes receivable.

Inventory
 You purchased pork worth P1,000 to be marinated and sold as barbecue.
 The cost of the pork purchased is recorded as inventory.

Prepaid supplies
 You purchased table napkins worth P2000 to be used in your barbecue operations
 The table napkins, while still unused, are assets recorded as prepaid supplies.
When used, they are recorded as supplies expense.

Prepaid rent
 You are renting a space for your barbecue stand. The lease contract required you to
pay P10,000 rent in advance
 The rent paid in advance is an asset recorded as prepaid rent. This amount will be
charged as rent expense when incurred (i.e. used up).

Equipment
 You purchased a barbecue grill worth P1,000.
 The barbecue grill is an asset recorded as equipment.
Acctg. Ed 1 - Financial Accounting & Reporting Unit 2 Module 4 Types of Major Accounts

Notes:
 The cost of equipment or similar item that is expected to be used over more than
one accounting period is initially recorded as an asset.
 The cost of this asset is then allocated over the period in which the equipment is
expected to be used.
 The portion of the cost that is allocated to the current period is called depreciation
expense.
 The total depreciation expenses recognized since the equipment was acquired is
piled up in the accumulated depreciation account.

Accumulated depreciation - Equipment

 You expect to use the barbecue grill for 5 years
 The cost of the barbecue grill will be allocated over the 5-year period that you will
be using it. The amount allocated each year is called the “depreciation expense.”
 The depreciation expense per year is P200 (P1,000 ÷ 5 years). Thus, after a year,
the accumulated depreciation of the equipment will be P200 (P200 x 1 yr.); after two
years, the accumulated depreciation will be P400 (P200 x 2 years.); after three
years, P600 (P200 x 3 yrs.), etc.
 In accounting, depreciation means an allocation of cost over the period where a
depreciable asset is used.

LIABILITY ACCOUNTS

Accounts payable
 You ran out of inventory of barbecue, so you went to Mr. Porky’s Meat Shop to buy
pork. You don’t have the available cash, so you promised orally that you will be
paying for the pork, worth P500, next week.
 The P500 payable is a liability recorded under accounts payable.

Notes payable
 Remember your P1,200 loan from Mr. Bombay? Well, he required you to write a
promissory note to repay the borrowed money at some future date.
 The P1,200 payable is a liability recorded under notes payable.

Interest payable
 Your loan from Mr. Bombay requires repayment within 30 days plus 20% monthly
interest (‘five-six’). At the end of 30 days, you will be incurring interest expense of
P240 (1,200 note payable x 20% interest rate).
 Prior to paying the interest, the accrued interest is recorded as interest payable.

Salaries payable
 By month-end, total salaries earned by an employee during the month amounted to
P8,000. However, the employee has not yet claimed the salary.
 The unpaid salary already earned by the employee is recorded as salaries payable.
Acctg. Ed 1 - Financial Accounting & Reporting Unit 2 Module 4 Types of Major Accounts

Utilities payable
 Your electricity bill for the month of January amounted to P2,000. The bill is not ye
paid.
 The unpaid utility already used but not yet paid is recorded as utilities payable.

Unearned income
 You received an order of barbecue worth P800. The customer paid the sale price but
instructed you to deliver the barbecue next week.
 Right now, the sale price collected is not yet earned (i.e., unearned) because the
barbecue is not yet delivered. Thus, the cash collection is initially recorded as liability
(i.e., unearned income) and will be transferred to income (i.e., sales) next week
when the barbecue is delivered.

EQUITY ACCOUNTS

Owner’s capital
 You invested P800 to your barbeque business.
 Your P800 investment is recorded in the Owner’s capital account.

Owner’s drawings
 You made temporary withdrawals of P200 from your barbeque business.
 Your P200 withdrawals are recorded in the Owner’s drawings account.

INCOME ACCOUNTS

Sales
 You sold barbecue worth P500
 The sale is recorded in the Sales account

For the rendering or services, as opposed to sale of goods, the income account
used is the Service fees account.

Interest income
 After a month, you will have earned the1% month interest on the loan you have
extended to your friend.
 The interest earned is credited to the interest income account.

EXPENSE ACCOUNTS

Cost of sales or Cost of goods sold

 The cost of the barbecue that was sold for P500 is P300.
 The P300 cost is expensed as Cost of sales or Cost of goods sold.
Acctg. Ed 1 - Financial Accounting & Reporting Unit 2 Module 4 Types of Major Accounts

Freight-out
 Your business has a hotline. Customers can order barbecue through phone call, text
message, or Facebook Messenger. No delivery charges. During the period, the cost
of gasoline for your motorcycle, attributable to delivering barbecue to customers,
amount to P100.
 The delivery costs of P100 are recorded as freight-out.

Salaries expense
 You hired a helper in your barbecue business. Your employee earns compensation
of P8,000 per month.
 At the end of each month, you will record the P8,000 earned by the employee as
salaries expense.

Rent expense
 You are renting a space for your barbecue stand. The rent is P5,000 per month.
 At the end of each month, you will record the rent expense of P5,000.

Utilities expense
 After a month of operations, your business received electricity bill of P2,000 and
water bill of P200.
 The electricity and water bills are recorded as utilities expense.

Supplies expense
 The cost of table napkins used during the period amounted to P50.
 The cost of the supplies used is recorded as supplies expense.

Bad debt expense

 Of your total accounts receivable of P500, you expect to collect only about P480.
 The P20 uncollectible balance is recorded as bad debt expense.

Depreciation expense
 The P1,000 cost of the barbecue grill will be allocated over the 5 years that you will
be using it. The amount allocated each year is called the “depreciation expense.”
The depreciation expense per year is P200 (P1,000 ÷ 5 years)..
 At the end of the year, you will record the allocated cost of the barbecue grill o P200
as depreciation expense.

Advertising expense
 You paid Justin Bieber P5,000 to endorse your barbecue business.
 The P5,000 payment is recorded as advertising expense.

Insurance expense
 You have obtained a one-year, fire insurance for your barbecue stand for P12,000.
 The used-up portion of the insurance is recorded as insurance expense.
Acctg. Ed 1 - Financial Accounting & Reporting Unit 2 Module 4 Types of Major Accounts

Taxes and licenses expense

 During the period, you paid local taxes amounting to P500
 The local taxes paid are recorded as taxes and licenses.

Interest expense
 (See ‘Notes payable’ and ‘Interest payable’ above)
 At the end of the month, you will record P240 interest expense.

Loss
 Your barbecue grill is stolen.
 The carrying amount of the stolen barbecue grill is charged as a loss. The carrying
amount is computed as “Acquisition cost minus Accumulated depreciation.” The cost
of the barbecue grill is P1,000. If the accumulated depreciation is P400, the carrying
amount is P600 (1,000-400).

SAQ # 1

Identify the following:

1. An___________ is a record of the increases and decreases in a specific item of

asset, liability, equity, income or expense.
2. The three parts of T-account are: (a)______________, (b) ____________, and
(3) _______________.
3. ________ is the left side of an account, while __CREDIT___ is the right side.
4. _______________________ are classified as balance sheet accounts
5. ___________________ are classified as income statement accounts
6. _________________ __ is a list of all the accounts used by the business.
7. _________ is increases in assets, or decreases in liabilities resulting to increases
in Capital.

ASAQ # 1

Identify the following:

1. An__ACCOUNT__ is a record of the increases and decreases in a specific item

of asset, liability, equity, income or expense.
2. The three parts of T-account are: (a)__ACCOUNT TITLE___, (b) __DEBIT
SIDE___, and (3) ___CREDIT SIDE___.
3. _DEBIT__ is the left side of an account, while __CREDIT___ is the right side.
4. _ASSETS, LIABILITIES & CAPITAL__ are classified as balance sheet accounts
5. __REVENUE & EXPENSES___ are classified as income statement accounts
6. ___CHART OF ACCOUNTS __ is a list of all the accounts used by the business.
7. _REVENUE_ is increases in assets, or decreases in liabilities resulting to
increases in Capital
Acctg. Ed 1 - Financial Accounting & Reporting Unit 2 Module 4 Types of Major Accounts

Activity No. 1
IDENTIFICATION

Instruction: Indicate the classifications of the accounts listed below as either an

ASSET, LIABILITY, CAPITAL, REVENUE, or EXPENSE account under COLUMN A
and as either a BALANCE SHEET account or an INCOME STATEMENT account
under COLUMN B
Account Titles COLUMN A COLUMN B
1 Accounts receivable ASSETS BALANCE SHEET
2 Bad debt expense
3 Building
4 Notes Payable
5 Rent Expense
6 Owner’s equity
7 Interest income
8 Cash
9 Gain
10 Computer equipment
11 Depreciation
12 Utilities
13 Freight-in
14 Rent income
15 Unearned income

Activity No. 2
IDENTIFICATION

Instruction: Same as Activity 1 above

Account Titles COLUMN A COLUMN B
1 Taxes and licenses
2 Furniture & fixtures
3 Supplies expense
4 Interest expense
5 Inventory
6 Land
7 Accounts payable
8 Notes receivable
9 Prepaid insurance
10 Loss
11 Prepaid supplies
12 Rent payable
13 Sales
14 Interest receivable
15 Transportation equipment