FUNDAMENTALS OF ACCOUNTANCY,

BUSINESS AND MANAGEMENT 1

MODULE
Module No. 4: Week 4: First Quarter
CHART OF ACCOUNTS

Learning Competencies
Prepare a Chart of Accounts.
Code: ABM_FABM11-IIId-e-21

Objective
After reading this module, the learners will be able to:
1. Define the accounts used in preparing the chart of accounts.
2. Appreciate the importance of chart of accounts.
3. Prepare a Chart of Accounts

Let’s Understand
Now that we have learned what basic accounting equation is and what accounts are, the next
important thing that we must know is the chart of accounts. According to CHED (2016), a
chart of accounts is a listing of the accounts used by companies in their financial records. The
chart of accounts helps to identify where the money is coming from and where it is going. It is also the foundation
of the financial statements.
An example of a chart of accounts is given below:
CHART OF ACCOUNTS

ASSETS REVENUES
Account Account
Accounts Account Title Account Title Accounts
Number Number that can be
that can be
101 Cash 401 Service Income seen in an
seen in a
102 Accounts Receivable income
balance
sheet or 103 Medical Supplies EXPENSES statement.
statement 104 Prepaid insurance 501 Advertising Expense
of financial 106 Furniture and Equipment 502 Insurance Expense
position. 107 Accumulated Depreciation – Furniture & Equipment 503 Maintenance Expense
108 Medical Equipment 504 Miscellaneous Expense
109 Accumulated Depreciation – Medical Equipment 505 Rent Expense
506 Salary Expense
LIABILITIES 507 Supplies Expense
201 Accounts payable 508 Tax Expense
202 Accrued Expenses 509 Utilities Expense
204 Loan Payable 510 Depreciation Expense

EQUITY
301 Owner's, Capital
302 Owner's, Drawing
305 Income Summary
Note: Please see Module 3 for the definition of Assets, Liabilities, Owner’s Equity, Revenue/Income and Expenses

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Account numbers are assigned to the accounts to facilitate recording, cross-referencing, and retrieval of
information. Although there is no standard way to assigning of account numbers, account numbers should be
assigned in a manner that the accounts are categorized logically.
Each business shall formulate a chart of accounts that best suits its needs. Large corporations may have thousands
of accounts and have more digits in their account numbers. Smaller companies may have fewer accounts and
fewer digits in their account numbers. As the number of accounts increases, the digits in the account numbers also
increase to accommodate the increased number of accounts.
The account titles in the chart of accounts shown above are number in the manner below:
The first digit in the 3-digit numbering refers to major types of accounts.

Major types of Assigned

accounts number Account
Account Title
ASSETS 1 Number
LIABILITIES 2 101 Cash
OWNER’S EQUITY 3
REVENUE 4 The first digit signifies that this
EXPENSES 5 account is an asset account.

Note: To easily remember the arrangements of major accounts and its corresponding first digit account number. Just remember “ALORE”

To promote comparability, a business shall use account titles that conforms to the PFRSs (Philippine Financial
Reporting Standards) and industry practices. Furthermore, regulated business should have charts of accounts and/or
account numbering system that conform to relevant regulations.
COMMON ACCOUNT TITLES
The following are the common account titles and their descriptions.
ASSETS can be classified further into two. These are current assets and non-current assets.
Current Assets are those reasonably expected to be realized in cash within one year from the reporting data
or the normal operating cycle, whichever is longer.
Non-current Assets are a company's long-term investments for which the full value will not be realized
within the accounting year. These assets are classified as plant, property and equipment (PPE), if they meet the
following criteria:
1. They must be more or less permanent in nature.
2. They must not be used for business operations; and
3. They must undergo depreciation, except land.
Account Titles Description
CURRENT ASSETS
Currency, coins, and checks that the business has received from customers and other
Cash
sources that have or have not yet been deposited in its bank account.
Accounts Receivable The total amount owed to the business by charge account customers.
Income already earned but not yet collected, such as interest earned on promissory note
Accrued Income
issued by the customer before the maturity date of the note.
is a balance sheet account that reflects the interest income a business has earned but for
Interest Receivable which a customer or debtor has yet to pay. This type of account is commonly used by
businesses that charge interest on loans and credit lines offered to customers.
This is a contra-asset or a valuation account which refers to the portion of receivable that
Allowance for bad
is estimated to be uncollectible at the end of a particular accounting period. Another term
debts
is “allowance for doubtful accounts.”

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 The total amount owed to the business by charge account customers, supported by written
Notes Receivable
or formal promises to pay in the form of promissory notes.
Inventory The purchase price of the goods that are held for sale by a business.
The cost of value of such things as wrapping paper and packaging tape and twine, printer
SUPPLIES/
ink, envelopes, stamps, paper, and other assets of a similar nature that the business will
Supplies on hand
use up in performing its activities.
Prepaid Represents the cost of unused office and other supplies. We use this account title during
supplies/Unused adjusting entries.
supplies
Prepaid rent Rent paid in advance.
Prepaid Insurance Cost of insurance paid in advance.
Investment in Short-term investment in stocks of other business (also known as marketable securities)
Trading and
Securities
NON-CURRENT ASSETS
The lot on which the building of the business has been constructed or a vacant lot which
Land
is to be used as future pant site. It is not subject to depreciation.
Building The structure owned by a business for use in its operations.
This represents manual or automated machines used in the business and they include
Equipment photocopying machine, computers, laptops, ring binders, laminating machines, delivery
vehicles, and vans.
Furniture and This represents assets such as tables, chairs, filing cabinets, and display racks.
Fixture
Intangible Assets Example: patent, franchise, copyright, trademark
Accumulated The total amount of depreciation expenses recognized since the building was acquired
depreciation and made available for use. This account is a contra-asset.

LIABILITIES can be classified further into two. These are current liabilities and non-current liabilities.
Current liabilities are debts or obligations that are expected to be settled by payment of cash, delivery of
goods, or performance of service within its normal operating cycle or withing one year form the reporting date.
Non-current liabilities are debts or obligations reasonably expected to be paid in cash beyond one year or
one accounting cycle.
Account Titles Description
CURRENT LIABILITIES
This refers to open accounts which represent the amount of money owed by the business
Accounts payable
to creditors or suppliers.
This refers to open accounts which represent the amount of money owed by the business
Notes payable
to creditors or suppliers evidenced by a promissory note.
This represents the amount of money borrowed by the business form third party
Loan payable
creditors.
Unearned This represents cash collected by the business in advance for a service or good that is
revenues/Unearned yet to be rendered or delivered.
income
are the opposite of prepaid expenses. (also called accrued liabilities) are payments that
Accrued expense a company is obligated to pay in the future for which goods and services have already
been delivered.
Interest incurred but not yet paid. Interest payable arises from interest-bearing liabilities.
Interest payable
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 (e.g., electricity, water, telephone, internet, cable TV etc.) already used but not
Utilities payable
yet paid.

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 NON-CURRENT LIABILITIES
This represents the amount of money borrowed by the business from a bank or a lending
Mortgage payable
institution which is secured by collateral.
Notes payable long Amounts on signed formal notes due after one-year from the date of the statement of the
term financial position.
Amounts payable after one year form the statement of financial position date on long-
Installment term installment notes, such as those signed by the consumers when buying automobiles
contracts payable and household appliances. Installments due within one year from the statement of
financial position date are listed as current liabilities.
EQUITY
Account Titles Description
Owner’s, CapitalIt is the value of cash and other assets invested in the business by the owner of the business.
It is an account debited for assets withdrawn by the owner for personal use from the
Drawing
business.
It is an account that receives all the temporary accounts of a business upon closing them at
Income summary
the end of every accounting period. This account is used in closing entries.
REVENUE or INCOME

Account Titles Description

This refers to the earnings made by any business that is into rendering services. The term
Service Revenue “revenue” is used and not “income” to distinguish that such an earning arises from the amin
line of operations of the business.
This represents interests credited by the bank to the account of the business arising from
Interest Income bank deposits. Notice that the term “income” was used since earning interests from bank
deposits is not the main line of operations of the business.
Sales This represents the earnings made by any business that is into selling goods or merchandise.
This represents earnings made by professionals or experts from rendering services to their
clients. Professional include lawyers, doctors, and certified public accountants, among
Professional fees others. Thus, this can be considered as a revenue account or an expense account. To
distinguish between the two, a company’s chart of accounts can have both Professional fees
Income and Professional Fees Expense.
EXPENSES

Account Titles Description

This refers to costs associated with the usage of electricity, water, and communication for
Utilities Expense
a particular accounting period.
This refers to costs incurred associated with the services rendered normally by permanent
Salaries Expense
and full-time employees who are paid on a regular basis, usually monthly
This refers to costs incurred associated with the services rendered normally by contractual
Wages Expense and temporary employees and workers who are paid on an hourly rate or based on output.
(contractual, or hourly rate)
Taxes Expense This represents cost to settle taxes.
Licenses Expense This represents cost incurred to register the business, to acquire the right to operate.
Cost of Sales or Cost This refers to cost of merchandise or goods that were sold during a particular accounting
of goods sold period.
Supplies Expense This refers to the amount of supplies that was used during a particular accounting period.
Doubtful accounts This refers to the amount of accounts receivable that is estimated as uncollectible and is
expense recognized as an expense in the current accounting period.
Depreciation This refers to the allocated portion of the cost of property plant and equipment charged to
expense expense in the current accounting period.
Advertising Expense Represents the cost of promotional marketing activities during the accounting period.
Insurance Expense Represents the cost of insurance pertaining to the current accounting period.

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 Transportation Represent the necessary and ordinary cost of employees getting from one workplace to
expense another which are reimbursable by the business.
Represent the costs incurred when travelling on business trips. Example: out of town travel
Travel expense
cost of employees sent to seminars.
Represents the cost of borrowing money. It is the price that a lender charges a borrower for
Interest Expense the use of the lender’s money. Other terms for interest expense are finance costs and
borrowing costs.
Miscellaneous Represents various small expenditures which do not permit separate presentation.
expense

Notes: The term “earned” relates to income, while the term “incurred” relates to expenses.
The “unused” portion of a cost is an asset, while the “used” portion is an expense.

Accounts The Rules of Debit and Credit

Increase Decrease Normal Balance
ASSETS Debit Credit Debit
LIABILITIES Credit Debit Credit
CAPITAL Credit Debit Credit
DRAWING Debit Credit Debit
REVENUE Credit Debit Credit
EXPENSES Debit Credit Debit

GENERAL INSTRUCTION:
1.Read and follow instructions carefully.
2. Write your answer on a separate sheet of paper.
3. Answer this activity with all HONESTY and INTEGRITY.
Let’s Apply
Activity 1: Indicate whether each of the accounts listed below is an ASSET, LIABILITY,
OWNER’S EQUITY, REVENUE or EXPENSES account.

1 Cash 11 Accounts Receivable

2 Accounts payable 12 Medical Supplies
3 Accrued Expenses 13 Prepaid insurance
4 Medical Equipment 14 Furniture and Equipment
Accumulated Depreciation – Accumulated Depreciation – Furniture &
5 Medical Equipment 15 Equipment
6 Advertising Expense 16 Owner's, Drawing
7 Insurance Expense 17 Salaries Expense
8 Owner's, Capital 18 Utilities Expense
9 Maintenance Expense 19 Miscellaneous Expense
10 Loan Payable 20 Advances from customers

Let’s Analyze
Analyze the statements below and determine the affected account/s in each transaction and in
which financial statement the account can be seen (balance sheet, income statement) 4 points
for each number

1. Purchased office equipment for cash.

2. Performed services to customers on account. (Assuming that the business is following the Accrual basis of accounting)

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 3. The owner invests cash to the business.
4. Received cash for providing services to customers.
5. Purchase supplies on account.
6. Paid telephone bill for the month.
7. Rendered services to clients to clients receiving a promissory note.
8. The owner withdrew cash for personal use.
9. Paid employee’s salaries.
10. The owner invested additional cash to the business.
Follow the example template in writing your answers on your paper.
BUSINESS TRANSACTION ACCOUNTS AFFECTED BALANCE SHEET/INCOME STATEMENT
Rendered services receiving Service revenue Income Statement
cash Cash Balance Sheet

Let’s Try
The following are transactions of Mrs. Mina Ty, in her laundry shop business during the month
of June 2020, her first month of business operation:

Instructions: For every transaction below, determine the accounts affected, classification of
account (asset, liability, equity, revenue, expense), and prepare a chart of account for Mrs. Mina Ty laundry shop.

June Mrs. Ty invested P 750,000 cash in the business.

1
2 Purchased for cash a secondhand delivery truck amounting to P300,000 to be used in the
business.
4 Purchased supplies on account worth P7,500
7 Billed customers for services rendered amounting to P22,500
9 Rendered services to customers for cash, P15,000.
11 Paid the advertisement of business amounting to P3,000
14 Invested additional cash in the business, P150,000.
15 Purchased P75,000 worth of office equipment on account with a written promise to pay next
week.
17 Issued check in payment for the supplies purchased on June 4.
18 Received P7,500 cash from customers billed on June 7.
22 Purchased additional P7,500 worth of office supplies for cash.
24 Issued check in payment for the promissory note issued on June 15.
29 The owner withdrew P7,500 cash for personal use.
30 Paid the salary of staff, P18,000

Follow the example template in writing your answers on your paper.

Date Accounts Classification
Affected of Accounts
June 1 Cash Assets
M. Ty, Capital Equity

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