Types of Major Accounts 1

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 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. This is the “account title.”

Cash
Debit Credit The term “credit” (Cr.) simply1
1-Jan. 500 1refers to the right side of the
3-Jan. 1,000 800 4-Jan. account. It is sometimes referred
Balance 700 to as the “value parted with.”

The term “debit” (Dr.) simply1

refers to the left side of the The difference between the total debits and credits in the account
account. It is sometimes referred represents the balance of the account (500 + 1,000 – 800 = 700).
to as the “value received.”
If total debits exceed total credits, the account has a debit balance. If
total credits exceed total debits, the account has a credit balance.

1These terms and their abbreviations come from the Latin words debere (Dr.) and credere (Cr.).

The Five Major Accounts

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

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 resulted from past events and
can require you to give up resources when settling them.

3. EQUITY – is assets minus liabilities.

4. INCOME – are 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 gains.

a. Revenue arises in the course of the 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:
Types of Major Accounts 2

Your business is selling barbecue. The income you derive form selling barbecue is called
revenue (i.e., sales revenue) because selling barbecue is your main business (ordinary business
activity).

One day, you decided to replace your old beach umbrella. The umbrella has a carrying
amount* of P2,000 in your accounting books. You were able to sell the old umbrella for
P2,200. The difference between the selling price of P2,200 and the carrying amount of P2,000,
represents gain (P2,200 – P2,000 = P200 gain). This is because selling of umbrellas is not 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:
In your barbeque business (See Example 1 above), the cost of the barbeque you have sold is an
expense.
If you were able to sell old umbrella with carrying amount of P2,000 for P1,600, the
difference now of P400 represents as loss (P1,6000 – P2,000 = P400 loss).

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

Classification of the Five Major Accounts

The five major accounts are classified according to the financial statement where they appear
as follows:
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 sub-component 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.

The financial statements are discussed in detail in Part 2 of this book.

Types of Major Accounts 3

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.

Chart of Accounts
BALANCE SHEET ACCOUNTS INCOME STATEMENT ACCOUNTS

Account Account
No. No.
ASSETS INCOME
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
150 Prepaid supplies
155 Prepaid rent
160 Prepaid insurance
170 Land
180 Building
185 Accumulated depreciation – Bldg.
190 Equipment
195 Accumulated depreciation –
Equipment

LIABILITIES EXPENSES
210 Accounts payable 510 Cost of sales
220 Notes payable 515 Freight-out
230 Interest payable 520 Salaries expense
240 Salaries payable 525 Rent expense
250 Utilities payable 530 Utilities expense
260 Unearned income 535 Supplies expense
540 Bad debt expense
545 Depreciation expense
550 Advertising expense
555 Insurance expense
560 Taxes and licenses
565 Transportation and travel expense
570 Interest expense
575 Miscellaneous expense
580 Losses
EQUITY
310 Owner’s capital
320 Owner’s drawings

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 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 on their account numbers.
Types of Major Accounts 4

Smaller companies may have fewer accounts and fewer digits on their account numbers. As the
number of accounts also increase to accommodate the increased number of accounts
The account titles in the chart of accounts shown above are 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
LIABILITIES 2
EQUITY 3
INCOME 4
EXPENSES 5

Thus, in the chart of accounts, the 3-digit numberings of all assets start with 1; 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 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(a) to a related account.
180 Building
185 Accumulated depreciation – Bldg.
The third digit signifies that this account, “Accumulated
depreciation – Bldg.” is a contra-account to the “Building” account.

(a)
Contra and adjunct accounts are discussed in the next chapter.

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 system 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);
Types of Major Accounts 5

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 “Philippine Revised Chart of Accounts for National
Government Agencies.”

Common Account Titles

The following are the common account titles and their descriptions.

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 promises to pay.

 Allowance for bad debts – the aggregate of estimated losses from uncollectible
accounts receivable. Another term is “allowance for doubtful accounts.”

 Notes receivable – receivables 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 of 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 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
(Items ‘c’ and ‘e’ are used interchangeably in practice because they may refer to similar assets. However, the term ‘office
equipment’ may be used to strictly refer to those that are being used in the office. For example, a shelf used in the office may
Types of Major Accounts 6

be included in ‘office equipment’ while a shelf used to display goods for sale may be included in ‘furniture and fixture.’
Furthermore, items included in ‘furniture and fixtures’ are normally those that are movable. Immovable items are included in
‘building improvement’ account of ‘leasehold improvement’ account.)

 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 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

account receivable from you, it means that you an account payable to me. This is also
true for notes payable and notes receivables.
“Accounts” vs. “Notes”: You go to a sari-sari store and tell the owner, “Aling
Nena, pautang nga po ng isang lata ng sardinas. Pakilista.” In here, Aling Nena has an
account receivable from you. On the other hand, you have an account payable to Alling
Nena. 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 the 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 an “account” because your
promise to pay is made formally or 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.

(It should be noted that future interest, salaries and utilities are not recorded. These items must be incurred first
before they are recorded, e.g., for interest, there must be a passage of time; for salaries, labor must have been
provided by employees; and for utilities, these items must have been used.)
 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.
Hints:
 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.
Types of Major Accounts 7

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  Withdrawals or distributions to the
owners. owners.
 Income or Profit earned by the  Expenses or Loss incurred by the
business. business.

 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
 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 barbeque, sale of souvenir
items, etc.)

 Interest income – revenues earned from the issuance of interest-earning receivables.

 Gains – income earned from the sale of assets (except inventory) or form 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.

 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 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.
Types of Major Accounts 8

 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 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 – represent 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 separate 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,
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 cots 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 expense 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 – expenses which may or may not arise form the ordinary course of business
activities. Losses may arise from:
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
Types of Major Accounts 9

and other calamities, decrease in the value of foreign currencies held due to changes in
exchange rates.

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. For
example, the cost of unused office supplies is an asset (prepaid supplies) while the cost
of office supplies used during the period is expense (supplies expense).

Drills on Account Titles

ASSET ACCOUNTS

Accounts receivable
 A customer bought barbeque worth P500 form your barbeque business. He told you that
he will pay for it next week.

 The P500 collectible from the customer is recorded as an account receivable.

Allowance for bad debts (Allowance for doubtful accounts)

 The customer with the P500 account receivable is broke. You have estimated you can
only collect P420 from him.

 The P80 (500 – 420) uncollectible amount is recorded as bad debts and accumulated in
the allowance for bad debts account. (See also ‘bad debt expense’ below)

Notes receivable
 Your friend borrowed P1,000 from your barbeque 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 note receivable.

Inventory
 You purchased pork worth P1,000 to be marinated and sold as barbeque.

 The cost of the pork purchased is recorded as inventory.

Prepaid supplies
 You purchased table napkins worth P200 to be used in your barbeque operations.

 The table napkins, while still unused, are assets recorded as prepaid supplies. When
used, they are recorded as supplies expense. (See also ‘Supplies expense’ below)

Prepaid rent
 You are renting a space for your barbeque stand. The lease contract required you to pay
Types of Major Accounts 10

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 barbeque grill worth P1,000.

 The barbeque grill is an asset recorded as equipment.

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 periods 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 barbeque grill for 5 years.

 The cost of the barbeque 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 yrs.); after three years, P600
(P200 x 3 yrs.), etc.
In accounting, depreciation means an allocation of cost over the periods where a
depreciable asset is used.

LIABILITY ACCOUNTS

Accounts payable
 You ran out of inventory of barbeque, 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? (see previous chapter) Well, he
required you to write a promissory note to repay the borrowed money at some future
date.
Types of Major Accounts 11

 The P1,200 payable is a liability recorded under the 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. (See
also ‘Interest expense’ below)

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.

Utilities payable
 Your electricity bill for the month of January amounted to P2,000. The bill is not yet
paid.

 The unpaid utility already used but not yet paid is recorded as utilities payable.

Unearned income
 You received an order of barbeque worth P800. The customer paid the sale price but
instructed you to deliver the barbeque next week.

 Right now, the sale price collected is not yet earned (i.e., unearned) because the
barbeque 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 barbeque is delivered.

 The account title “Advances from customers” may be used in lieu of the “unearned
income” account. Both are liability accounts.

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
Types of Major Accounts 12

 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 barbeque worth P500.

 The sale is recorded in the Sales account.

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

Interest income
 After a month, you will have earned the 1% monthly interest on the loan you have
extended to your friend. (See ‘Note receivable’.)

 The interest earned is credited to the interest income account.

EXPENSE ACCOUNT

Cost of sales or Cost of goods sold

 The cost of the barbeque that was sold for P500 is P300.

 The P300 cost is recognized as expense described as Cost of sales or Cost of goods
sold.

Freight-out
 Your business has a hotline. Customers can order barbeque through phone call, text
message, or Facebook message. No delivery charges. During the period, the cost od
gasoline for your motorcycle, attributable to delivering barbeque to customers,
amounted to P100.

 The delivery costs of P100 are recorded as freight-out.

Salaries expense
 You hired a helper in your barbeque 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.
Types of Major Accounts 13

Rent expense
 You are renting a space for your barbeque stand. The rent is P5,000 per month.

 At the end of each month, you will record P5,000 as rent expense.

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. (See also ‘Prepaid
supplies’)

 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. (See also ‘Allowance
for bad debts’)

Depreciation expense
 The P1,000 cost of the barbeque 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). (See also ‘Accumulated
depreciation’.)

 At the end of the year, you will record the allocated cost of the barbeque grill of P200
as depreciation expense.

Advertising expense
 You paid Justin Bieber P5,000 to endorse your barbeque business.

 The P5,000 payment is recorded as advertising expense.

Insurance expense
 You have obtained a one-year, fire insurance for your barbeque stand for P12,000.

 The used-up portion of the insurance is recorded as insurance expense.

Types of Major Accounts 14

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 ’note payable’ and ‘interest payable’.)

 At the end of the month, you will record P240 interest expense.

Loss
 Your barbeque grill is stolen! Oh no! ☹

 The carrying amount of the stolen barbeque grill is charged as a loss. The carrying
amount is computed as “Acquisition cost minus Accumulated depreciation.” The cost
of the barbeque grill is P1,000. If the accumulated depreciation is P400, the carrying
amount is P600 (P1,000 – 400).