Chap 4 – Types of Major Accounts

The 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, 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 - 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 account.

The Five Major Accounts

The five major accounts, also called the elements of the financial statements, are the items in the
expanded accounting equation discussed in the previous chapter. Let us recall these items.

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 resources when settling them.

3. EQUITY - is assets minus liabilities.

4. INCOME - is increases in economic benefits during the period in the form of increases 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 during 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 during the
ordinary activities of an entity.

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 during the ordinary activities of a business.

b. Losses represent other items that meet the definition of expenses and may or may not arise during
the ordinary activities of the entity.

Classification of the 5 Major Accounts

BALANCE SHEET INCOME STATEMENT

ACCOUNTS ACCOUNTS
1. ASSETS 1.INCOME
2. LIABILITIES 2.EXPENSES
3. EQUITY

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 subcomponent of the statement of
comprehensive income, which is also one of the components of a complete set of financial statements.
The income statement shows the profit or loss of a business.

Chart of Accounts

A chart of accounts is a list of all the accounts used by a business:

The following is an example of a basic chart of accounts:

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 number, account numbers should
be assigned in a manner that the accounts are categorized logically.
The account titles in the chart of accounts shown above numbered 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
LIABILITES 2
EQUITY 3
INCOME 4
EXPENSES 5

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.
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.

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 account numbering systems that conform to 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 the
Cooperative Development Authority (CDA); and

c. The chart of accounts and the account numbering system of a national government agency must
conform to the Revised Chart of Accounts (RCA) issued by the Commission on Audit (COA)