108 LE a pier AM yf i Acne 105 Chapter 4 ‘The Five Major Accounts P ‘The Five major secount also called the elements ofthe fn! Types of Major Accounts Matoments, are actually the items in the expanded accounting le pe cuation dicusse in the previous chapter Lat us recall thee arming Objectives hems 1. State the fve major accounts 2_Giveexamples of each major type of 1. ASSETS ~ ae the economie resources you control that have ‘The Account Account Is the basic storage of information in accounting, Is 3 record ofthe increases and decreases in a specific Hem of asset, lability equity, income or expense ‘An account may bedepicied through a “T-account” A“T- account” ie clled as such Because it resembles the leer “7” A “Taccount has thee pars, namely 1. Account ttle ~ describes the specific item of asset, ability, ‘uit income or expen. 2, Debit side the lf sd of the account. 3. Credit side —the righ sie ofthe acount, "nas as i atreition one he Ltn whe bere (2) and credo resulted from past events and can provide yous with future 2. LIABILITIES — are your present obligations that have rested from past evenls and can require you to Rive up resources hen etlng ther, EQUITY is sets minus Hibs, 4 INCOME ~is increases in econamic benefits during the period fn the form of increases in astets, or decreases in Habit, that resol in increases in ey, exchding those relating (0 Investments by the business owner. Income includes both renee and gains 2. Revenue aries in the course of the onfinay acts of 3 businem eg sales and service foes. 1b. Gaine represent other items that meet the definition of income’ and. may or my not arisen the course of the ‘ordinary activities ofan entity, Errol ‘Your business sell barbecse. The income you derive from the cond asset account sted inthe chase ii__[ Gah ‘Accounts Fea Te scored gs fr to poate exon! ls ond he Tigo nw ey a oa the cha fore The tied digit in the Sgt mombering, if rot zer, signifies Tot the account is conta account oan adjunct acount to 2 elted acount. 180. ss Building : Accumulated depreciation - BR. TepetiSicn® dg te cone scout he Salo con nd art accautsoe onan een Soe “To promote comparability, » busines shall use account ites that conform to the PERS: (Pilipine Financial Reporting Stands) and industry practices. Furthermore, regulated pusinemes should have charts of accounts and/or account umbenng system that conform to felevant regulations, For ‘ample: the chart of accounts of bank should conform to the chat of _Zounts endorsed by the Bangko Sentral ng Pipnes OS?) Tes Maj acts m 1b. The chat of accounts ofa cooperative should conform to the chart of accounts endorsed by the Cooperative Development ‘Authority (CDA): and © Thochaet of accounts and the account numbering system of @ national government agency must conform 10 the Reval ‘Guart of Acounts (RCA) isued by the Commission on Audit (©on. Common Aceount Tiles ‘The following. are the common account tiles and_ their descriptions, BALANCE SHEET ACCOUNTS ASSETS = Cash ~ includes money or its equivalent that ls readily ‘available for unrestricted use cash on hand and ash in bank + Accounts receivable — recuvables supportet by oral or Informal promises to pay: + Alowance for bad debts - the aggregate amount of estimate losses from uncollectible accounts receivable. Another erm is “allosanee or doubful acounts.” + Notes receivable - receivables supported by verte o formal ‘romses to pay in the form of promissory notes. + Inventory ~ presents the goods that are held fr sale by @ business” Fora) manufacturing business, inventory also Inches goods undergoing the process of production a rave ‘materials that willbe consumed in Uhe production process ‘+ Prepaid supplies ~ represents the cost of ums office and other suppliesm2 crapert ‘+ Prepaid rent rent paid in advance Prepaid insurance ~costof insurance paid in advance. ‘+ Land — the tot on which the building ofthe business has been constructed or a vecant ot which i to be used as future plant site Land snot depreciable Building ~ the stractare owned by a business for use in Is operations . + Accumulated deprecation - bullding ~ the total amount of Gepreiation expenses recognized since the building was ‘seule and made available for use “+ Equipment consists of various assets such as: 2 Machineries and othe factory equipment 1. Transporation equipment eg, vehicles, delivery tracks ©. Office equipment ef desks, cabinets chats 1. Computer quipment, eg server, personal computers, laptops ‘e. Fumie and fissures, eg. desks, cabinets, movable partons (tems ‘€ and ‘e”ame used interchangeably In practic because they sma rele to similar ansets. However, the term fice fupmet” may be used to strictly refer to those that are being toed inthe office, For example, a shelf used in the office may be included in ‘office equipment whe a shelf used to display goods for sale may be included in funiture and fotures’ Furthermore, items included in foriture and fixtures are normally thove that fre movable. Immovable ems are incided in “building improvement account oreasehold improvement’ account) Bf ir Acris 3 Accumulated depreciation - equipment -the total amount of depreciation expenses recognized since the equipment was facquited and made available or use CCletvely. land, building and equipment are refered 10 “Property, plant and equipment” “Capital assets,” or “Fixed tiasiLiTies Accounts payable ~ obligations supported by oral oF inlaemal [romnaes to pey bythe debtor, Notes payable ~ obligations supported by weiten or formal promises to pay by he debtor ih the form of promissinsachn, Accounts payable an accounts receivable are oppests Meaning. if have an account receivable fom yo, Hf means that you have an account payable #9 me. This is alo tre for notes payable and notes rece “Accounts! vs, "Notes": You go toa sar-sari store and tell the ovwner, “Aling Nowa, pang ga po ng fang fata ng sardines. Pail.” there, ling Nena has” an account receivable fam you. On the other hand, you have an account payable to Aling Nena. Its an “account” rather than 3 “noe” cause your promise to pay is made orally or informally (ie, iis Another example: You go ia bank to obtain a oan. The hank requires you to fill up's formal and pre-printed form Calle promissory wate. The priory moe willbe notarized by a lawyer and te corresponding documentary samy tes will be pid. Inher, the bank has @ note receivable from you, On the Dither hand, you havea note payable to the bark. This ime, itis {note other than an “account” because your promise pay is cade formally o in wring.f all us capers «Interest payable ~ interest incurred but not yet paid Interest payable antes from interest-bearing Hiabilities. For example ‘You wil incur interest on your bank oa. «Salaries payable — salaries already eared by employees but not yet pais by the business. «= Uilties payable — utilis (eg, clectrity, water, telephone Internet cable TV, et) already used but not yet paid (ahold pote ht treet slr and is re mot ended Sree abe tered en tte hy are reorded = for ire ‘BuccmehaveBen page ie for slr He eves mst ave SEISP SLE sceu an oruee they muntnaveakendy been we) «+ Uneamed income — lems rlatd to income that were collected Im advance before they are earned. After the eaming prooos is ‘completed, these items ae transierred to income. 98 Hibs 2 The word “receivable” connotes an aset, while the Word “payable” cones a ably ar The word “prepaid” connotes an ase. while the word NUneamed” connotes ably. EQUITY (Capital, Net assts o Net worth) > Owner's capital (or Owner's equity) ~ the residual amount after deshctng labios fom assets “The Owners Capital accounts INCREASED by: DECREASED by: > vestments oF Withdrawals or contributions by the isrbutions to the F Income or Profit eamed [> Expenses or Loss incurred bythe business by the business. ys of Maer dest ns > Owner's drawings ~ this eccount is used to record the temporary withdraveasof the owner during the period. At the ‘end of the accounting period, any balance in this account is ose tothe Owner's capita” secu INCOME STATEMENT ACCOUNTS. Income Service fes - revenies cared fom rendering services (eg. services ofa spa, services ofa beauty salon etc) > Sales revenucs exmed from the sale af goods (eg, sale of ‘barbecue, se of souvent items et). > Interest income — revenuct earned from the isuance of Imorestbearng receivables > Gains — income cared from the cale of asets (exept inventory) or from enhancements of assets or decreases in ible tha are not classified revenue EXPENSES > Cont of sales (or Cost of goods sold) — represents the value of Inventories that have been sold during the accounting period. > Freight-out — represents the sles costs of delivering goods {ocustomers, Other terms for feigh-out are “line expense,” “rensporation-ou,” an carige outwards.” > Salaries expense — represents the salaries eamed by temployess for the services they have rendered during the Secountingpecod, > Rent expense - represents the rentals that have been used up ring the accounting period,Uiilites expense — represents the cost of utilities (e- leciricity, water ielephone, internet, cable TV, etc) that have been used during the accounting period. "A business can also have separate accounts for each type of utility, eg, “Electricity expense.” "Water expense,” “Technology and Communication expense" and the lke. Supplies expense - represents the cost of supplies that have been used cing the pec, Bad debt expense - the amount of estimated losses from ‘uncollectible accounts receivable during the period. Other term is “doubt accounts expense.” Depreciation expense — the portion of the cost of a Aeprecable asset (ee, builsing or equlpaent) that has been allocated tothe current accountng period. Advertising expense ~ represents the cost of promotional or ‘marketing activites during the period. Insurance expense — rpresents the cost of insurance pertaining to the curent accounting period, “Taxes and licenses — represents the cost of business and local taxes required by the government for the conduct of business (eg. mayor's permit, her percentage taxes, community ten. For corporations and partnerships, income taxes are recorded ina separate acount called “Income tx expense “Transportation and tavel expense 1 Tramportation expenses represent the necessary and ‘ordinary cost of employees Rettig from one workplace to nother which are reimbursable by the business, eg Miscellaneous Type Mar Acts 47 reimbursable taxi fares of employses running some ‘errand and thowe who are working om late shift, > Travel expenses represint the costs cured when travelling on business tips, eg, out-ol-town travel cots tt employees sent to seminars Interest expense — represents the cost of borrowing money. It 's the price that a lender charges a borrower forthe use of the lenders money. Other terms for interest expense are finance ets nd borrowing ost Intern! expense and inlenst income are opposites. For ‘example, you will incur interest expense on the money you boreotved from Mr. Bombay. On the other hand, Mf Bombay vill enn interest income ‘expense — represents various small ‘expenditures which do not warrant separa presentation, Losses — expenses which may or may not arse from the ‘ordinary course of business activites. Losses may ace fro a. Sole of assets other than inventory, at asa price that ia teas the the catarg car bb. Decreases Jn the value of assets due t© destruction, damage, obsolescence and olher changes in values caused by market factor, eg, loa on fre, earthquake, storm, and ‘other calamities decrease inthe value of foreign ‘urtencis held due lo changes in exchange rates, “True” rater to expeeee, % The "onied™ potion of cit fan ave, whe the “used” potion fan expense. For example the cost of wn fee Spl I ape ved supp. wha the cox f fe ‘ppl tno during te pret onponse uy exein).18 Shaper Drils on Account Titles [ASSET ACCOUNTS ‘Recounts receivable '& A-customer bought barbecue worth P50) from your barbecue ‘business He told you that he will pay for it next wok > The P50 collectible fom the customer is recorded as accounts receivable. ‘Allowance for bad debts (Allowance for doubtful accounts) ‘& The customer with the P500 account receivable is broke. You nave estimate that you can ony collet P20 from hin > The P80 (500 ~ 420) uncllectible account i evar as ba debts expense and accumulated inthe allowance for bad debts acount. "Notes receivable © Your friend borrowed #1,000 from your barbecue business You required from him a pion ramissory mts to repay the _money within 20 days pas 1% monthly interes. Tventory + You purchased pork worth P7,000 to be marinated and sold as 9 Mr Amat ng > The table npn, while sill used ave assets recorded as prepaid ‘spies he sk eye ree ain xa a Prepaid rent You are renting a space for your barbecue stand. The lease contrac required you to poy P0,000 rent in advance. The ren paid in adeance i an ast recorded as prepaid rent. This amount wl be charged as rent expense then incre (he, sed op Equipment 4 You purchased a barbecue gell worth P.000, > The barbecue gril son ase cond as equipment Notes ‘The cost of equipment oF similar em thet is expected to be sed over more tha ome accounting peri ie intally recorded san asset 1 "Tho cost of this aset is then allocated over the period in which the equipments expected 10 be used | 1 "The portion ofthe cost that i allocated tothe curren period is called depreciation expense. 1 "Tho total deprecation expenses recognizsd since the equipment was acquired is piled up in the accumulated {eprciation account ‘Accumulated depreciation - Equipment You expect to use the barbecue gril fr 5 years > The cost of the barbecue geil willbe allocated over the S-yar period tht you will be using it The amount alate each year f= ‘alled the “depreciation expense”= cups “The depreciation expense por oar P200 (F100 + 5 yrs ‘hus, after year, the accumulated depreciation of the equipment sell be F200 (P200 x 1 yr afer Feo years the accumulated eprecaton willbe P400 (P2002 yrs.) after tee years, PDO (2003 yr), te In accounting, deyreiation means a allocation of cost over the periods whore adprciabe asset nse yp Major Aunts mm Salaries pay + Diy month-end, total saries earned by an employee during, the month amounted to P8000. However, the employee has not yet claimed the salary. 2 The unpaid story already eared by the employee is recon a salaries payable, Utilities payable hore eee © Your electricity bill for the month of January amounted to ‘Accounts payable | P2000. The bills mot yet pai, ‘You tan out of inventory of barbecue, so you went to Mr. a Porky's Meat Shop to buy pork. You don't have the avalable > The unpilutiby already wed but mat ye paid i rvordod as cash so you promised orally that you willbe paying for the ities payable pork, worth POD, next week ne “ ‘Uneamed income > The F500 payable a ability rosrded under accounts payable [ Notes payable '& Remember your P1200 loan from Mr. Bombay? (ste previous chapter @) Well, he rouired you to write a promis repay the borrowed money a some Future date 1 The P1200 pyabe i nity record der motes payable. Interest payable Your loan from Me, Bombay requires repayment within 30 days plas 20% monthly interest (fivesix). At the end of 30 days. yon wll be incurting interest expense of F240 (1,200 note payable» 20% interest ate > Prior to poying the interest, the accrued terest is recorded as interest payable, (Ser alao “terest expens' below) You received an order of bazbeove worth #800, The customer paid the sale price but instrced you to deliver the barbecwe ext week, > Right me, the sale prio collected is mot yet eared (unearned ecu he arbre sno ye dliseel Tas, the es collection is inialy reared as Hiahly ie, aearned income) and willbe transfered Yo income (he, see) next eek ton Ue Barbee is deter > The account titles “Advances from customers” o¢ “Unearned revenue” may be used i iu of the “uncar icone” account EQUITY ACCOUNTS You invested P800 to your babeque business > Your #300 inestment record the Otomers capital acountFd apie peo Me Ant Treightout © Your business has @ hotine. Customers can onder barbecue though phone call text message, or Facebook Messenger: No Aelivery charges: During the period, the cost of gasoline for your motoryele, attnbutable to delivering, barbecte to fustomers, amounted to F100. [ Owner's drawings @ You made temporary withdrawals of 200. from barhegue busines > Your P200 withdrawals are recorded in the Owner's dra scout The dtvery costs of P00 are recndel ws freight-ont INCOME ACCOUNTS gies = He Salaries expense ere You hired a helper in your barbecue business, Your employee You sold barbecue worth P50. > AL Me ond of ac month, you wel record the P8000 cerned by the > The sales recorded in the Sales account ‘rployee as salaries expenee. For the provision of services, as opposed to sale of goods, {income account use i the Service fees account Rent expense 4 You are renting 2 space for your barbecue stand. The rent is £5,000 per month, interest income “After a month, you will hve earned the 1% monthly i fo the loan you have extended to your frend. (See ’Ni seceivable’ above) At the end ofeach month ou wil record ent expense of 5,000. ‘ies expemae > Theinterest care seit to the terest income ssn After a month of operations, your business resved electricity ‘lo P20 a water bl of P00 EXPENSE ACCOUNTS > the clecticity and wate ils are recoded as wiltes expense ‘Cost of sales or Cost of goods sold + "Thocost of the barbeeve that was sold for PSU #300, Sea. ‘The cost of able napkins used during the period amounted to 50. (See alo “Prepaid supplies’ above) > The F300 cost is expensed as Cost of sales or Cost of sold > The cost ofthe supplies usd is corded as supplies expense.m Cua [ Bad debt expense + Of your total accounts ecevable of PSO, you expect to col ‘only about PAO. > The P20 uncolectibe lance i rounded as bad debt expense. ko Allowance for ba eb abe) ‘Depreciation expense {© The PLOOO cos ofthe harbecue gel will be located over the years that you will using it The amount allocated each ye iscalled the “deprecation expense,” The depreciation expe per year is P200 (P1000 + 5 years). (See aso “Accumulat Sepreiation’ above.) > At the end of the year, you wil recor the aca cost of tel arbecue gril of #200 as depreciation expense “Advertising expense You paid Justin Bicber #5,000 10 endorse your barbecu business > "The P5,000 payments vesordes as advertising expense Tnsurance expense You have obtained a oncyear, fire Uasurance for yout trrhecue stan forP12.000. T > ‘The used up portion ofthe insurance is reegrded as insurance exponse. / “Taxes and licenses expense | & During the period, you paid local taxes amount 1 The local aves pad are recorded as taxes and Hicenses nterest expense 4 (Seo Notes payable’ and “interest payable’ above oss Chapter’ Summary: — sf Major Accum ws Acthe end ofthe month, you wil record #240 interest expense ‘Your barbeewe grill isstolen| Oh not@ “The carvings amount ofthe stolen barbecue grils charged as 2 tose. The enerying amount is computed as "Acquisition cst minus Accumulalod deprecation.” The cst of Ue barbecue ga {1,000 I the accumulated depreciation is P00, the carrying, amounts P50 (1,000 400), TAN account ts a record of the increases and decreases in a pectic tem of asst, ability, equity, income or expense. It Is thre parts, namely: (1) acu! tle, 2) debi sid, and (3) tre sie Debit isthe left side of an account, whi side, The balance of an account is the difference between dhe total lebits and toa credits in that account “The five major accounts are: Asiets, Liabilities, Equity, come and Expenses ‘Ase tibltes and equity ane balance shet acount, while ‘note and espenses ae hc statement accu. 1A chart of ecounts 36 a ist of all the accounts used by the brasness ‘Account numbers age assigned to each account 4 facilitate recording cro referencing and retrieval of information crits the rightChapter 5 Books of Accounts and Double-entry ‘System Learning Objectives 1th use f the two books of accounts. 2. xplai the rule of debits and credit, “The Books of Accounts {A business mnailain wo books of account, nay 1. Journals and 2 Ledger Journal “The journal, also called the “book of original entries” is ‘accounting record here business transactions are first recor Busines trinsactions are recorded inthe journal through jour ‘entries This econdng process is calle journatizing. Types of Journals Journals can be classified into the following: 1. Speci Journal ~ is used to record tansactions of asim -sature. Special josenalssimplty the recording process providing an efficient way’ of recomding and retrieving Information. Common examples of Special journals \ Salo journal ~ i ase to record sales on acount 1, Purses journal ~ bs used to record purchases ofinvgnt Cich rexpte journal — is geod to record all tranact lewolving receipts of cash. 4d. Gish disbursements journal — i used © record transactions involving payments of cash foto ctu nl beng Stee 139 [A business may have other special journals 4 sult is neds. For example: “Purchase retorns juimal,” "Sales ret joumal ee 2 General journal ~ AM other transactions that cannot be recorded in the special journals are recorded in the general journal Examples of such transaction elude purchases of inventory in exchange for notes payable, adjusting entries, correcting ‘entries, reversing entries, and the ke, Te a business doesnot utilize special journals, all it transactions are recorded in the general journal Pexamples 4 You sold barbecue to a customer who promised orally to pay the sale price next week, > This tansaction involves sale on account; therefore, Is recorded in the les ourna, You sold barbecue to a customer who immediately paid the sale pice. > This transaction involves the rcpt of eas therefore, ts recorded in the os resp jour fe You sold barbecue to a customer who promis in writing to paythe sale price next week: > This transaction cannot be recorded in the special joanals therefore, iis recorded in the gra journal0 ow Ledger ‘The ledger a systematic compilation ofa group of accounts. I ‘used to classify the effects of busines transactions an the a ‘The ledger is also called the "book of secondary entries” oF “hook of final entries” because itis used only after busi wansactions are frst recorded in the joumals. The process Genstal Ledger St of counts nt Door Stn sat Subsdian-Ledgers [ Accounts Receivable from | Customer A; P20,000 -ecoring in the ledgers calle “posting.” ‘Recounts Receivable, ive.000 Kinds of ledgers Lusdgers canbe classifi into the following: 2. Gineal ledger ~ contains al the accounts appearing i the balance by Subidiory Iodger ~ provides a breakdown of the balances ‘controlling accounts “A contrllng account (oe contrat account Is ove which consists of ‘Recounts, Revable From ‘Customer 8, P3000. | Accounts Receivabte fom] soup of accounts with similar nature. ‘The balance of ‘controlling account is shown in. the general lodge, while balances ofthe accounts that comprise the controlling account shown in the subsidiary lager. Not all accounss in the ledger though are controling. accounts. Only thove wt Dalances necessarily need a breakdown are considered contol Cesta P3000. 2 Summa Description — | Fiction Tou & Bookof > Journaling 2 Genel furl original Ct 1 Spel furl ents ecoring) F tedger F Book of] Ponting 2 Coverage secondary | (Costing) 1 Subsidy Ledgers | _ entries Exam: You sell barbecue on credit. The balance of credit sales not calleted $5. P0000. This information is shown. in. Acct osreb, which is a controlling account in the General Laer However, knowing only the total Balance i insultick ‘You need a breakdown of this amount, You ned Information ‘which exstomers owe you money and the amount each cist ‘wes you. This information is provided by the Subsidiary L ‘Analyze the illustration Belov,Formats of the Books of Accounts General Joumal Agneral journal can have the following format: Srange ene ‘eces = ‘BaTT6 | Carpurer eauipmer ther columns may be included, such a posting refire (PRef) which is used to crosereterence josmal entries 40 ledger, and journal entry munber (G} No.) which is sed to mum the joa entries Special Journal ‘Asposal journal can have the following format: i i : i ut aad ai feet gees ay a peraye sre (oma wondioea w simony “pay Ep aqquanaa ns “TWNWAOT SLaHOIW HSV HY ‘ipa Rapes as RE EY PT aChaps 4 General Ledger & Subsidiary Ledgers GENERAL LEDGER SUBSIDIARY LEDGERS, [Nao Credit | Balance | Debit ne! "ACCOUNTS RECEIVABLE ‘Date Balence forwarded Balance forwarded [isis Aunts nd Dontecntry Sten us Double-entry system [Al rancactions are recorded in the accounting records using the Souble-entry system.” Under this system, each transaction Is seconded in vw parts ~ debit and credit 'No transaction is recorded by a debit alone or a credit lone. For each amount that is debited, there must be a Corresponding amount that is credited, and vice-versa, Th is in ler forthe accounting equation tobe Balanced ata Himes. Lat ny ime the accounting equation does not balance there is an Recall from our previous discussions that debit (Dr) Iirmpy refers to the let side ofan account while crit (Cr) refers fo the right side of an account ‘Concepts of Duality and Equilibrium ‘The doubleentry system involves the use of the concepts of duty” ana “equiv The concopt of duality views each transaction 3s having » ta fold ft on vats ~ a valve received and a value parted with, ond ach transaction is record wing at leat two accounts 1b The concept of equilibrium requires that each transaction is recorded in terms of ual debits and credits For every peso Aebited, there Is a corresponding, peso credited, and viee Normal balances of accounts ‘he normal balance of an account ison the se where an increase Jn that account is recorded, The following are dhe normal balances fof accounts Type of Account Normal balance Asset Debit Lsbality Creat Equity Creat income Creat Expense 1 pebit6 cuapers “To help us member the normal balances of accounts, let us ecll the expanded basi accounting equation: (Rests = “Faulty > Tacoma Bap Nite spats" which son the ft se ofthe equation has a normal debt bance se “iatlien” “Equity,” and “Income” which are additions on the right se ofthe equation have normal eredit balances. ce “Eipomee’ which is a deduction on the eight side of the ‘equation has anormal dba balance ce Income increases eguty, thas, it has a normal credit balance (Game with equity) Expense decreases equity, thus it as a horina debt Balance (opposite of that of eqs) > Nnotier way to depict the normal balances of the accounts is asfollows Enns ‘CREDITS, Assets + Expenses |= | Liabilities + Equity + Income i Frimaly aivce Vencourgs you f@ meme the normal | fauuces ot the ceoune aw ahs well make your study of | secounting much ease. Rules of Debits and Credits TFovdeit anaceount with a normal debit balmce means to increas) thot account To eri it means to decrewse “To eet an account with a normal cet balance means Increase that account. To debt t mean to decrease it. Analyze the table below. ks f Auman Dobe entry Sytem a7 ‘Asset | Debit | Increase | Decrease Liability Credit | Decrease, | increase quily Credit Decrease © Ancrense Income Credit | Decrease "Inerease Expense Debit Increase _|_ Decrease © Recall he fling oneal ‘Am account takes the Form of 3 "T-aceoumt™ which resembles ‘he alphabetical eter “7.” The left side ofall scouts is the debit side, while the right de of all accounts the erat side ‘The normal bolance of an account i the side where that sccount is inereased “The previous concepts are integrate in the following illustration Balance Sheet Accounts: ASSEFACCOUNTS LABILITY ACCOUNTS Dai ior — [Cxedittor — “Dabitfor | Ceitfor Increases) | decrenses¢) decreases), | meeases +) —_BQumTv a Dai for decreas) | increases (2) Income Statement Account: TRPENSEACCOUNTS — __INCOMEACCOUNTS Deitior [Creditor —— “Drbtior | Credit for Icressea(s) | decreases) decreases) inecases (2)108 chapter Ending balance of an account Debits to a speciic asset or expense account should be great ‘thay (or qual to) the credits to that account. On the other ha credits to a ability, equity r income account should be great ‘thaw (or qual to) the debits to that account The difference between the monetary totals of debits an credits to an account represents the enaing balance of t ‘ccount The minimum ending balance of an account is ero ‘curs when the total debits equal foal credits t an account, an asset or expense account reslts to an ending bal thats acre, meaning the total amount of debits ess than the totatamount of credit, the account is sti to have an abnor balance. This means a recording enor has been committed. Al correction is needed to eliminate the abnormal balance. Ths is also true when a lability, juty, oF inane account results 0 AB fending blance that isa debit. Analyze the T-ccounts below 4 ASSETACCOUNT Debit Credit 700) 20 Ending Balance i (4100 Dr. -20 Cr) NORMAL* + The ending balance of PAD 2 “normal Balance” because the total bits is greater than the toa credits (i.e, 100-> 20, 2 ASSET ACCOUNT Debit Crest 100 100 Ending Balance 5 (00 Dr. 100 Cr) NORMAL” + The asset account has ¢ zero balance. This is the minimum Dalance an asset account can have. A zero balance occurs when total debits equal total credits Bt Aco nd Doi cry Sto 9, ASSET ACCOUNT Det Credit ~ [120 Ending Balance 20, 0Dr.~120.Ce) ABNORMAL” * The ending balance of the asset account is an “abnormal lance Ipc the total debits are less than the total credits, 4 LaaBiLiry account Debit ‘Cott awe) oar ee Ending Balance (0 Cr. 100 Dr) ABNORMAL* 0 * The ending balance of the Hability account is a “abnormal Its” boca the total credits are less than the ttal debits ustration: Rules of debits and erodits Case #1: Asset account A the beginning of the petiod, you have a cash balance of P2000. During the period, you had total cash collections amounting to 10,000 and made total cash payments of PS.000. Royuirement; Using “T-account” analysis, compte for the ending Ialance of your cash. Solution150 ‘coupe Beginning balance Cash collections Ending balance >The beginning balance is placed on the debit side becau “Cash is a asset account and assets have a normal det balance, i- Cash collections ierease the balance of cash; thus, they a placed om the debit side. = Cash payments decrease the balance of eashy thus, they placed on the credit side. sr The ending balance isthe difference between the debits credits in the account, Its computed as follows: 2,000 Dr 10,000 Dr. = 8,000 Cr = 4,000 ending talc. © The 2000 andl 10,000 amounts are added because they are debits, The 8.000 amount is deducted because is a ret. {Reber the along "Debit and debit” ress to addition. Same is tue for cr and ert” "Debit and “cei,” or vice-versa, ess to deduction. Case $2 Liability account [At the beginning of the period, you havea note payable of PL. During the periad, you obtained an addtional loan amounting ‘PAOD and made total payments of P50, Roqurement: Using. a T-count, compute forthe ending balance notes payable. Solution sand Doub Seon 2 131 Notes payable a T= | 1.200 Beginning balance Payments on the loan 500_| $00 Adaltional loan 1500 Ending balance Note “©The beginning balance is placed on the credit side bocause Notes payabke iain labial ane Kebittie bie normal credit balance. “© Additional loan increases the balance of notes payable; thus, {s placed on the cred side. “© Payment of loan decreases the balance of notes payable; thus, itis placed on the debit de © The ending balance is the difference between the total credits fand tolal debits in the account. The ending balance is computed as follows: 1.200 Cr. +800 Cr. ~ 500 Dr = 1500. © The 1.200 and 800 amounts are added because they are both ‘credits, The 50 amount is deducted becatse itis debit ‘Contra and Adjunct accounts 4 Some accounts have related accounts to them. An account related to another account is referred to as cither a contra account oF 97 fatjunct account DS Contre accents wre presented in the financial statements a eduction to thei related accounts > Adjunct asounts are presented in the financial statements as ‘addition to thie related accounts. Thus > I an account has @ normal debit balance, is coma account has a normal eed balance (the opposite). To eet anormal seb balance means to deduct152 chante Aso nd Deer Sem 153 fan account has a normal debit balance, its adjunct acco hhasa normal debi Balance (he sama). To debit a normal balance means tad, punt rosivable 100,000 (On the other hand lone or ad debts (20,000) > fan account has a normal credit balance, its contra accout mts receivable —met ee hhas a normal debit balance (the opposite) To debit a m0 roi balance means to det. > Tran account has a normal credit balance its adjunct accom has a normal credit balance (the same). To craft @ nor coi galance means to add ‘he “Allowance for bad debts” i deducted because iis 3 tra account 9 "Accounts rceivable” ple: have building with a istorcal cost of 1,000,000 and. an undated deprecation of ®300,000. How auch is the enrrying fount of your building? [© A contra asset account hos a normal credit balance, while ujunet asset account has a normal debit balance. Examplesof acount wiht accounts: | eco Ty Amante oan es am Pet erection -Ruiting 000000) 2 Typeatsceoune CO ae ue ACCOUNT. Coa amr > mang 5 Recimelsed Sopra bang > Type of acount CON _|7 Récouse Snipe hess deprecaon tauipoent > Type er aecount: CONTRA ACCOUNT The sum of the balances of an account and its related contra ot adjunct account Is called the met carrying amount (or Simply the ‘carrying amount’ ofthat account Example I ‘Your accounts receieable has a bance of P10,600, while the related) tilinance for bud debts account asa balance of ¥20,000. How much Is the carrying amount of your accounts receivable?