Lesson 1: Major Accounts

Introduction

     As we have learned from the previous lesson, accounting concepts start from the basic equation: 

                Assets =  Liabilities   +  Equity

    But what actually makes up assets? What composes liabilities and equity? Things such as cash, plant and
equipment, long-term debts would now enter into the picture.  All of these are components of one of the three
parts of the accounting equation, called accounts.  In this lesson. we will discuss the major accounts that are
contained in the accounting equation.  We will explore also revenues and expenses, which are accounts
representing some of the changes in equity.

 Types of major accounts: 

1.  Assets

2.   Liabilities

3.  Owner’s Equity, Income and Expense.

Assets

Assets are the resources owned and controlled by the firm.

Current Assets are all assets which are expected to be realized within the ordinary course of a business, or a
span of 12 months, whichever is longer.  Realization here only means that these assets are expected to be
converted into cash, sold or disposed after a certain time, or through the passage of time.

1.  Cash is money on hand, or in banks, and other items considered as medium of exchange in business
transactions. 

2.  Accounts Receivable are amounts due from customers arising from credit sales or credit services.

3.  Notes Receivable are amounts due from clients supported by promissory notes. 

4.  Inventories are assets held for resale 

5.  Supplies are items purchased by an enterprise which are unused as of the reporting date.

6.  Prepaid Expenses are expenses paid in advance. They are assets at the time of payment and become
expenses through the passage of time. 

7.  Accrued Income is revenue earned but not yet collected 

8.  Short term investments are the investments made by the company that are intended to be sold
immediately
Noncurrent Assets  are a company's long-term investments for which the full value will not be realized within
the accounting year.

1. Property, Plant and Equipment are long-lived assets which have been acquired for use in operations.

 2. Long term Investments are the investments made by the company for long-term purposes

3.  Intangible Assets are assets without a physical substance. Examples include franchise and copyright.

Liabilities

Liabilities are the debts and obligations of the company to another entity.

Current Liabilities are liabilities which are expected to be settled or paid out by the entity within 12 months. 
Paying out does not necessarily mean payment through cash, but can also include conversion and/or
refinancing.

1. Accounts Payable are amounts due, or payable to, suppliers for goods purchased on account or for services
received on account. 

2. Notes Payable are amounts due to third parties supported by promissory notes. Notes payable pay interest
regularly, either implied through discount, or through fixed periodic payments stated in the written agreement.

3.  Accrued Expenses are expenses that are incurred but not yet paid (examples: salaries payable, taxes
payable)

4.   Unearned Income is cash collected in advance; the liability is the services to be performed or goods to be
delivered in the future.

5.  Current Portion of Long -term Debts are long term debts payable within the coming year.  Some long-
term debts, due to their large principals, usually have features that allow the borrower to pay on an installment
basis.

6. Other Payables include those which are due from the entity outside the normal course of its business. These
include common items such as dividends payable and interest payable, and unusual items such as payables
arising from lawsuits.

Noncurrent Liabilities form the residual portion of liabilities.  These are liabilities which the entity expects to
settle after more than a year, or have the legal or contractual capacity to defer payment accordingly.

1. Loans Payable - If any portion of the loan is still payable as of the date of a company's balance sheet, the
remaining balance on the loan is called a loan payable. Any other portion of the principal that is payable in
more than one year is classified as a long term liability.

2. Mortgage Payable is the liability of a property owner to pay a loan that is secured by property. From the
perspective of the borrower, the mortgage is considered a long-term liability.
Equity , Income and Expense

Owner’s Equity is the residual interest of the owner from the business.  It can be derived by deducting
liabilities from assets.  In the case of sole proprietorship and partnership, equity is also called Owner's
capital.  In the case of corporations, it is more appropriate to use the term shareholders' equity or stockholders'
equity.

1. Capital is the value of cash and other assets invested in the business by the owner of the business.

2.  Drawing is an account debited for assets withdrawn by the owner for personal use from the business.

Income is the Increase in resources resulting from performance of service or selling of goods.  Revenues are
the amounts received by a business earned as a result of selling something or rendering a service.  It is the
increases in equity as a result of day-to-day operations.

Revenues can be classified as follows:

1. Operating revenue - revenues that originate from main business operations (Examples: sales revenue, service
revenue)

2.  Non-operating revenue - revenues that do not originate from main business operations and are a result of
some side activities. (Example: Interest revenue, rent revenue of a business not engaged in the renting industry)

Expense is the decrease in resources resulting from the operations of business.  Equity decreases as a result of
expenses, losses and distribution to owners.  Expenses are the amounts consumed by the business to operate.  

Examples of Expense accounts

1.  Cost of good sold - when inventory is sold, the cost of goods sold reflects what the company incurred to
make the inventory sell

2.  Utility expense - include water and electricity and reflects the amount paid for

3.  Depreciation expense - a result of using building and equipment

4.  Office supplies expense - a result of using up office supplies

5.  Insurance expense - a result of insurance paid for, expiring over time

6.  Salaries expense - a result of recognizing salaries of company employees

7.  Bad debts expense - an estimate of how much accounts receivable the company will not be able to collect

8.  Interest expense - interest incurred as a result of borrowing money

Chart of Accounts

       A chart of accounts is a listing of all accounts used by a company in its operations.  The chart accounts is
classified according to the five major accounts in the following order:  assets, liabilities, equity, revenue and
expenses.  It includes reference numbers so they can be traced to the ledger.  
The following are the steps in the preparation of a basic chart of accounts: 

1. Create three columns.  

2. Prepare the assets first, then liabilities, then equity, then revenue and expenses. 

3. List all assets, liabilities, equity, revenue and expenses account in the first column. 

4. On the second column, choose an account code (discretion of the company). 

5. On the third column, write the description for each account on when to use it.