Chapter 4: Types of Major Accounts  Losses: represent other items that meet the

definition of income, may or may not arise in the

The Account course of the ordinary activities of an entity.
Account is the basic storage of information in accounting. It is the
record of the increases and decreases in a specific item of ALORE. Term: Carrying amount refers to the net amount at which an
An account may be depicted through a “T-account”. item is carried (recorded) in the books of accounts.

T-account Note: If the selling price is greater than carrying amount, the
- is called as such because it resembles the letter “T” difference is a gain. If otherwise, the difference is a loss.
- three parts: account title, debit side (Dr: debere) – also
referred to as “value received”, and credit side (Cr: credere) Classification of Accounts
– also referred to as “value parted with.” (1) Balance Sheet Accounts: Assets, Liabilities, and Equity
(2) Income Statement Accounts: Income and Expenses
The Five Major Accounts (Elements of Financial Statements)
(1) Assets – are the economic resources you control that have Chart of Accounts
resulted from past events and can provide you with future - is a list of all the accounts used by a business.
economic benefits.
(2) Liabilities – are your present obligations that have resulted Basic Chart of Accounts
from past events and can require you to give up resources Balance Sheet Accounts:
when settling them. Assets
(3) Equity – assets minus liabilities.  Cash
(4) Income – increase in economic benefits during the period in  Accounts Receivable
the form of increases in assets, decreases in liabilities, that  Allowance for Bad Debts
result in increases in equity, excluding those relating to  Notes Receivable
investments by the business owner.  Inventory
 Revenue: arises in the course of the ordinary  Prepaid Supplies
activities of a business, such as sales and service
 Prepaid Rent
fees.
 Prepaid Insurance
 Gains: represents other items that meet the
 Land
definition of income, may or may not arise in the
course of the ordinary activities of an entity.  Building
(5) Expenses - decrease in economic benefits during the period  Accumulated Depreciation – building
in the form of decreases in assets, increases in liabilities, that  Equipment
result in decreases in equity, excluding those relating to  Accumulated Depreciation – equipment
distributions to the business owner.
 Expenses: arise in the course of the ordinary Liabilities
activities of a business.  Accounts Payable
 Notes Payable
 Interest Payable
  Salaries Payable (3) Third Digit: if not zero, signifies that the account is a contra-
 Utilities Payable asset account or an adjunct account to a related account.
 Unearned Income
Common Account Titles
Equity Assets
 Owner’s Capital  Cash: money or its equivalents that is readily available
 Owner’s Drawings for unrestricted use (such as cash on hand and cash in
bank)
Income Statement:  Accounts Receivable: receivables supported by oral or
Income informal promises to pay
 Service Fees  Allowance for Bad Debts (Allowance for doubtful
 Sales Accounts): aggregate amount of estimated losses from
 Interest Income uncollectible accounts receivable
 Gains  Notes Receivable: receivables supported by written or
formal promises to pay in the form of promissory notes
Expenses  Inventory: goods that are held for sale by a business
 Cost of Sales  Prepaid Supplies: cost of unused office and other
 Freight out supplies
 Salaries Expense  Prepaid Rent: rent paid in advance
 Rent Expense  Prepaid Insurance: cost of insurance paid in advance
 Utilities Expense  Land: the lot on which the building of the business has
 Supplies Expense been constructed or a vacant lot which is to be used as
future plant site.
 Bad Debts Expense
 Building: the structure owned by a business for use in
 Depreciation Expense
its operations
 Advertising Expense
 Accumulated Depreciation – building: the total
 Insurance Expense
amount of depreciation expenses recognized since the
 Taxes and Licenses building was acquired and made available for use
 Transportation and Travel Expense  Equipment: consists of various assets such as
 Interest Expense machineries and other factory equipment, transportation
 Miscellaneous Expense equipment, office equipment, computer equipment,
 Losses furniture and fixtures
 Accumulated Depreciation – equipment: the total
Note: The account titles in the chart of accounts are numbered in the amount of depreciation expenses recognized since the
following manner: equipment was acquired and made available for use
(1) First Digit – refers to the major types of accounts
(2) Second Digit – refers to the account titles and the sequence Liabilities
on how they are listed
  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.
 Salaries Payable: salaries already earned by the
employees but not yet paid by the business.
 Utilities Payable: utilities already used but not yet paid.
 Unearned Income: items related to income that were
collected in advance before they are earned.
Notes: The word “receivable” connotes an asset, while the word
“payable” connotes a liability. The word “prepaid” connotes an asset
while the word “unearned” connotes a liability.
Equity
 Owner’s Capital – the residual amount after deducting
liabilities from assets.
 Owner’s Drawings – used to record temporary
withdrawals of the owner during the period. At the end
of the period, any balance in this account is closed to the
Owner’s Capital Account.
Income
 Service Fees: revenues earned from rendering services
 Sales: revenues earned from the sale of goods.
 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: value of inventories that have been sold
during the accounting period.
 Freight out (delivery expense, transportation-out, and
carriage outwards): sellers’ costs of delivering goods to
customers.
 Salaries Expense: salaries earned by the employees for
the services they have rendered during the accounting
period.
 Rent Expense: rentals that have been used up during the
accounting period.
 Utilities Expense: cost of utilities that have been used
up during the accounting period.
 Supplies Expense: cost of supplies that have been used
up during the accounting period.
 Bad Debts Expense (Doubtful Accounts Expense):
amount of estimated losses from uncollectible accounts
receivable during the period.
 Depreciation Expense: the portion of the cost of a
depreciable asset that has been allocated to the current
accounting period.
 Advertising Expense: cost of promotional or marketing
activities during the period.
 Insurance Expense: cost of insurance pertaining to the
current accounting period.
 Taxes and Licenses: cost of business and local taxes
required by the government for the conduct of business.
 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, while travel expenses
represent the costs incurred when travelling on business
trips.
 Interest Expense (Finance Costs and Borrowing Costs):
cost of borrowing money, a price that lender charges a
borrower for the use of the lender’s money.
 Miscellaneous Expense: various small expenditures
which do not warrant separate presentation.
 Losses: expenses which may or may not arise from the
ordinary course of business activities.
Notes: The term “earned” relates to income, while the term
“incurred” relates to expenses. The “unused” portion of a cost in an
asset, while the “used” portion is an expense.