CHART OF ACCOUNTS – alphabetical list of account titles used by the entity.

-this is found on your ledger book, where you can see pages filled with letters a-z with spaces
below every letter. This is where you will write the accounts you are using on your business.

CLASSIFICATIONS OF ACCOUNTS BEING USED BY A COMPANY:

1. ASSETS. These are the things you own. In Filipino, it is called “Pag-aari” or “ari-arian”. It is
further classified as Current assets and Non-Current Assets.
*CURRENT ASSETS – assets that can be liquidated or realized within one business cycle /
one year. When we say “Liquidation”, it means conversion to cash. Some current assets
are shown below:
a. Cash – Either cash on hand or cash in bank. This is used to pay off debts, buy
other assets, pay off expenses. This is also the payments received by the company in
exchange of the goods or services they offer.
b. Accounts Receivable – this refers to the unpaid amounts of our customers. In
Filipino, ito ang ating mga pinautang.
c. Inventories – these are the products we are selling. In a manufacturing set up,
inventories may be: (1) raw materials used to produce saleable products; (2) In process
materials, which are products in the production stage which are not yet finished; or (3)
Finished products, which are products that already saleable. For merchandising
businesses, inventories are simply the goods a business bought from its
suppliers/manufacturers that are already saleable. You may add the cost of freight
(delivery charge) that you paid/incurred to bring the goods from your
supplier/manufacturer to your warehouse/store in your inventory account.
d. Prepaid expenses – these are the advanced payments you made for your
business’ expenses. For example, you already paid 6 months advanced rent to your
lessor. Those payments will be considered as a prepaid rent. This account will increase
for every advanced payment you made, and will be deducted for every advanced
payment which has already lapsed.

*NON CURRENT ASSETS – assets which can be used for a long time. Examples are listed
below:

a. Furniture and Fixtures

b. Equipment

c. Land

d. Building

Note: These assets are recorded at Cost and will be depreciated through different
methods, but the most commonly used is the STRAIGHT-LINE METHOD. In this method,
 the cost of the asset less its residual value (Amount to be realized after an asset’s useful
life. Commonly, 0 residual value is being used) will be depreciated over it useful life.

Example: Equipment Costs P 200,000, with no residual value. Useful life is 10 years.
200,000/10= 20,000 depreciation PER YEAR.

2. LIABILITIES. These are accounts that our business owes. In Filipino, liabilities refer to “Utang”.
Just like assets, liabilities can also be classified as Current Liabilities and Non-Current Liabilities.
*CURRENT LIABILITIES – liabilities which is expected to be paid within 1 year. Below are
common examples:
a. Accounts Payable – this refers to the amount we owe from our suppliers.
b. Accrued/Unpaid Expenses – these are expenses we have already incurred but
not yet paid. Common examples are rent for the month which will be settled the
following month, utilities expense not yet paid at the end of the month, and salaries of
employees which are not yet paid. Take note that even this account title has the word
“expense” in it, it is considered as a LIABILITY Account and not an expense account.

*NON CURRENT LIABILITIES – liabilities which is expected to be settled for more than 1
year. One common example is:

a. Loans Payable – loan obtained which will be settled beyond 1 year.

3. CAPITAL. This is the investment made by the owner/owners. Different account titles are used
depending on the type of business. This is “puhunan” in Filipino.

*OWNER’S EQUITY – this is used if the business is a sole proprietorship

*PARTNERS’ EQUITY – this is used if the business is a partnership

*STOCKHOLDERS’ EQUITY – this is used if the business is a corporation.

4. EXPENSES. These are the costs that are matched with the revenues on the income statement. In
Filipino, Expenses are called “Gastusin”. Below is a list of some expense accounts.

a. RENT EXPENSE – monthly expenditures for rentals.

b. SALARIES AND WAGES – amount of compensation being paid to employees.

c. DE MINIMIS - minimum amount paid to employees as other benefits. These are very
small amount of income being paid to employees on top of their basic compensation.

d. TAXES AND LICENSES – amount paid for taxes and for licenses. This includes income
tax, percentage tax, payments for Fire inspection, payments made for licenses, etc.

e. PENALTIES – amount to be settled with BIR for penalties. This includes compromise
penalties for late filing/payment.

f. UTILITIES EXPENSE – Monthly expenditures for electricity, telephone and water.

g. TRANSPORTATION EXPENSE – expenditures for transportation.

 h. OFFICE SUPPLIES EXPENSE – expenditures for office needs. This includes expenditures
for bond paper, ball pen, ink, etc

i. DEPRECIATION EXPENSE – noncash expense that refers to the portion of the

noncurrent asset’s cost allocated for the month/year.

j. PROFESSIONAL FEES – expenditures paid to professionals like lawyer, engineer,

accountant, etc.

5. REVENUE. The income derived from operation of the business.

RULES OF DEBIT AND CREDIT

After knowing the accounts used by a company, we should know how to record these accounts
on our journal and ledger. The next thing we have to know is the normal balance of the accounts. In
accounting and bookkeeping, we have the rules of debit and credit. For every transaction, 2 or more
accounts will be affected, and for every debit, there’s a corresponding credit where all debits are equal
to all credits. Below is a table showing the normal balances of accounts.

NORMAL BALANCE

ASSET DEBIT

LIABILITIES CREDIT

CAPITAL/EQUITY CREDIT

DRAWING/WITHDRAWAL DEBIT

EXPENSES DEBIT

REVENUE CREDIT

*Debit refers to the left side of the column of the account, while credit refers to the right side of the
column of the account.

It is important that we know the normal balance of every account so that we will know how to write on
our books of accounts. It is also important for us to know the normal balance of the account so that we
will know how to record our transactions.

For accounts with a debit normal balance, recording those accounts on the left (debit) side means that
there is an increase in the balance of that account. Recording of Assets, Drawing and Expenses on the
right (credit) side means that there’s a decrease on the account’s balance.
For accounts with a credit normal balance, recording those accounts on the right (credit) side means
that there is an increase in the balance of that account. Recording of Liabilities, Capital and Revenue on
the left (debit) side means that there’s a decrease on the account’s balance.

RECORDING OF TRANSACTIONS ON YOUR GENERAL JOURNAL

Requirement: Prepare the journal entries for the following transactions:

1. Jan 1, 2020 Mr. Mark Fernandez invested cash worth P 50,000 to his own business.
2. Jan 14, 2020 Mr. Fernandez registered his business with DTI and BIR. Total fees for government
requirements are paid. Total amount is equal to P 4,500.
3. Jan 16, 2020 Mr. Fernandez purchased goods for sale with total amount of P 10,000. Freight
paid is P 500 on top of the cost of the goods.
4. Jan 17,2020 Purchased goods for sale worth P30,000. Purchases was made on credit.
5. Jan 21, 2020 Goods worth P10,000 are sold for cash worth P15,000.
6. Jan 23, 2020 Goods worth P5,000 are sold for credit worth P7,000.
7. Jan 25, 2020 Purchased goods for sale worth P10,000.
8. Jan 31, 2020 Mr. Fernandez paid rent to his lessor, Ms. Imperial. Monthly rental payment is P
6,000. Mr. Fernandez properly withheld taxes from his income payments.
9. Jan 31, 2020 Mr. Fernandez received his electric and water bill. His electric bill was worth 3,500
while water bill was worth 500. The said amount will be settled within 15 days from the date of
bill.

DATE ACCOUNT TITLE DEBIT CREDIT

Jan. 1 Cash 50,000

Mark Fernandez Capital 50,000

To record Mark Fernandez’ investment.

Jan. 14 Taxes and Licenses 4,500

Cash 4,500

To record payments made for business registration.

Jan. 16 Inventories 10,500

Cash 10,500

To record cash purchase including freight in.

Jan. 17 Inventories 30,000

Accounts Payable 30,000

To record purchases on credit.

Jan 21 Cash 15,000

Sales 15,000

To record cash sales.

Cost of Sales 10,000

Inventories 10,000

To record the cost of goods sold.

Jan 23 Accounts Receivable 7,000

Sales 7,000

To record sales on credit. (check index a below for supplemental information)

Cost of Sales 5,000

Inventory 5,000

To record the cost of goods sold.

Jan 25 Inventories 10,000

Cash 10,000

To record purchase of inventories.

Jan 31 Rent expense 6,000

Cash 5,700

Withholding Tax Payable 300

To record rental payment for January. (check index b below for supplemental information)
*withholding tax on rentals is 5% of the rental payments. In this case, 6,000*5% is equal to 300. Only
5,700 will be the cash remittance to the lessor, while the 300 tax withheld will be remitted to BIR using
for 0619E and a corresponding form 2307 will be given to the lessor, as a proof that the said amount of
300 is remitted to BIR.

Jan 31 Utilities Expense 4,000

Utilities Payable 4,000

To record unpaid utilities consumption for January. (check index c below for supplemental
information)

a. Once payment was made by the customer, the entry will be:
Cash 7,000
Accounts Receivable 7,000
To record customer’s payment.

*Your Accounts receivable balance will be reduced by 6,000 after this entry. If you are
wondering bakit ganyan ang naging entry, it is because nagbayad ang customer sa kanyang
pagkakautang. Dahil nagbayad sya, tataas ang cash mo kaya dinebit ang cash. Tapos dahil nga nagbayad
na sya, wala na syang utang sa’yo, kaya kinredit ang Accounts Receivable account. Tandaan na ang
Accounts Receivable ay isang asset account, at ang NORMAL BALANCE nito ay Debit. Ibig sabihin, kapag
ito ay kinredit ay pinapababa natin ang balance nito.

B. Once Mr. Fernandez filed and paid using BIR Form 0619E, the entry will be:

Withholding Tax Payable 300

Cash 300

To record payment of withholding taxes.

*In this entry, our Withholding Tax Payable and our Cash Balance will be reduced by 300.
Remember na ang normal balance ng Withholding tax payable ay Credit dahil isa itong Liability account,
at ang Cash naman ay Debit dahil ito ay isang asset account. Dahil nagbayad si Mr. Fernandez, bababa
ang kanyang WT Payable at dahil naglabas sya ng pera para ditto ay bababa rin ang kanyang cash
balance. This explains why nasa debit ang WT Payable, at kung bakit nasa credit naman ang Cash.
 c. When payments for utilities are made, the entry will be:

Utilities Payable 4,000

Cash 4,000

To record payment of utilities payable.

CLOSING ENTRIES AND DETERMINATION OF INCOME

Closing entries are done at the end of every month and at year end. Here, we will determine if our
business is earning or not. After closing entries, the balances of all temporary accounts will be ZERO.

Q: Anong mga kailangang i-close?

1. Expense accounts
2. Revenue Accounts

In short, ALL TEMPORARY ACCOUNTS/ACCOUNTS NA MAY KINALAMAN SA DETERMINATION NG

INCOME.

STEPS IN MAKING CLOSING ENTRIES:

1. Close all revenue accounts to income summary account.

2. Close all expense accounts to income summary account.
3. Close the income summary account to your capital account.

Q: What is INCOME SUMMARY?

It is a TEMPORARY account where all revenues and expenses are being transferred. It
has a CREDIT normal balance. If an income summary produces a CREDIT balance at the end of
the month/year, this means that the business operations yield an income for the month/year,
while a debit balance means that the operations yield a loss.

ILLUSTRATION:

Requirement:

1. Prepare closing entries for Mr. Fernandez’ business.

2. Determine whether his business yield an income or a loss.

STEP 1: CLOSE ALL REVENUE ACCOUNTS

In Mr. Fernandez’ case, his only revenue account is his Sales account.

Jan. 31 Sales 22,000

Income Summary 22,000

To close Sales account to Income Summary account.

STEP 2: CLOSE ALL EXPENSE ACCOUNTS

Jan. 31 Income Summary 29,500

Cost of Goods Sold 15,000

Taxes and Licenses 4,500

Rent Expense 6,000

Utilities Expense 4,000

To close all expense accounts to Income Summary account.

STEP 3: CLOSE THE INCOME SUMMARY ACCOUNT TO CAPITAL

Jan. 31 Mark Fernandez Capital 7,500

Income Summary 7,500

To close the income summary account to Capital.

*In this case, Mr. Fernandez’ business incurred a net loss for the month of January. This is the
reason why Capital account was debited, and Income Summary account was credited.

After all Closing entries, all revenue and expense accounts, as well as Income summary account’s ending
balance will be Zero.

FOR THE ILLUSTRATION ABOUT THE LEDGER, PLEASE REFER TO THE EXCEL FILE ASSOCIATED WITH THIS
FILE.

SAMPLES OF FINANCIAL STATEMENTS ARE ALSO ATTACHED.

FOR QUERIES AND CLARIFICATIONS, YOU MAY SEND AN EMAIL TO jouelaimperial@gmail.com