FIVE MAJOR ACCOUNTS

1. ASSET

As you remember, ASSET is the first part of the accounting equation. Asset is composed of the following accounts:

Current Asset

Current assets are all assets which are expected to be realized within the ordinary course of business, or a span of 12 months,
whichever is longer. (Florendo 2016) 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.

Let us be acquainted with the terms related to Current Asset.

1. Cash. Cash is the most familiar of all assets and it is classified as a current asset. Not all cash includes money. Money means
everything composed of bills and coins, considered as legal tender (such as the Philippine Peso in the Philippines, or legal tenders of
other nations (such as the U.S. Dollar). Cash, on the other hand, also includes money in the form of bank deposits in checking
accounts and savings accounts. It can also include checks, such as those provided by customers in payment for goods or services
received. (Florendo 2016)

2. Accounts Receivable. You and your friends went to an internet café to play videogames. Suddenly your friend went offline
because his time is out. Your friend asks you, “Can I borrow money from you? I will pay you tomorrow.” Since you are receiving
money from your friend, in accounting terms, you have accounts receivable coming from your friend.

3. Short-term Investments. The short-term investments account contains the company’s investments in low-risk, highly liquid assets
such as bonds and stocks, which are expected to be liquidated in less than a year. (Florendo 2016)

4. Notes Receivable. Just like accounts receivable, it is a promise to receive cash but unlike the latter, it is more formal. The
borrower can seek legal remedies to recover what has been lent. Because of its written nature, the term or the maturity dates are
longer compared to accounts receivable.

5. Inventories. Have you been to a warehouse? A grocery store? How about a sari-sari store? As you can see, there are lots of
products like diapers, candies, canned goods etc. hanging on the shelves or on the counter. In accounting terms, these products are
inventory. Aside from the products for sale, there are also inventory that includes raw materials, work-in-process items and
supplies.

6. Prepayments. You bought a prepaid WIFI. You paid Php 1,399.00 for 1-month subscription. Remember, you still have not used the
data. As long as your load balance or data is not yet depleted, you are considered to have a prepayment in your list of assets. A
prepayment is an amount simply paid in advance for goods or services anticipated to be received by the entity in the future.
(Florendo 2016)

Prepayments would end to be as such when they are finally used up. This is applicable in the following examples like:

• Rent • Utilities • Insurance paid in advance

Noncurrent Asset

If there are current assets, there are also noncurrent assets. Assets that do not meet the current asset classification are
noncurrent assets. You must remember that they don’t have to meet at least 12 months before their expected realization.

Let us be acquainted with the terms related to Nonconcurrent Assets.

1. Investments. You might hear of the word investments. You might think why is it included in noncurrent asset? Bonds and
stocks are short-term investments. The investments that we are talking here are the company’s investments which you do not
expect to realize within 1 year. Investment accounts such as real estate, long-term notes, government treasury bills, and funds that
are set aside for long-term purposes.

You might hear of SSS, GSIS, Pag-ibig, Phil health, and Intellicare from your parents. From your parents’ point of view, these
are long-term investments because they will be able to recover these through pension, home loan discounts and health benefit
premiums.
 2. Fixed Assets. Why is it called fixed asset? These assets are the most tangible of all assets. It is longestserving assets a
business/institution/company can have. They cannot be converted into cash since they are regularly placed as means of production.
The following are the examples of fixed assets:

a) Land d) Machineries
b) Land improvements e) Equipment
c) Buildings f) Furniture and Fixtures

Collectively, these fixed assets can also be called as property, plant and equipment (PPE).

3. Intangible Assets. Unlike fixed assets, these intangible assets lack physical substance, yet they are realizable over long
period of time.

Prime examples are:

a) Patents d) Goodwill
b) Copyright e) Trademark
c) Franchises f) Licenses

Most likely, they are represented by written documents or certificates stating their description and ownership status.

4. Other Assets. All the remaining assets which do not fall on the above mentioned are classified as other assets. But it is
discouraged to use this account to encourage more distinct classification of the asset. This account will be used for those assets that
are very much unique or hard to classify.

2. LIABILITY

Have you tried to borrow money from a friend or a classmate? If you borrow money, you have a responsibility to return the money
borrowed in due time may be with interest or the principal amount. If you remember the accounting equation, you can see liability
on the right-hand side of the equation. So, how important is liability? What are the other types of liability?

Current Liability

If we have current asset, we also have current liability. These liabilities are liabilities that must be settled or paid out within 12
months. Cash is not always involved in paying a liability, it can include conversion and/or refinancing.

1. Accounts Payable. Let us go back to my example in accounts receivable. Since your friend borrowed money from you,
you have accounts receivable coming from your friend meanwhile your friend has an accounts payable that he/she might settle
depending on the terms that you gave him/her. In accounts payable, the entity of the paying side is the borrower while in accounts
receivable, the entity of the receiving side is the creditors.

2. Notes Payable. Just like in notes receivable, notes payable are written promises of the borrower to pay a certain sum of
money. Usually, it arises from larger trade or business transactions which it is so necessary for additional formality, but it can also
arise from the regular borrowings of the entity. It is the opposite of the notes payable.

3. Accrued Liabilities. Accrued liabilities are all other accounts which the company should pay, arising from the normal
course of business. Throughout the operating cycle, it is very much possible that the company has already received benefits from
certain events yet has still been unable to pay for it. (Florendo 2016)
For example, you are building a house. You have four carpenters. These carpenters already finished building your kitchen, although
you already benefited from their services still you just paid them after a week.

Another example is your postpaid internet connection, water supply or electric supply. You enjoyed the benefits of these things
within a month, yet you have not paid them. Same goes with rent.

4. Current Portion of Long-term Debts. From the word itself, these are long-term debts payable within the coming year.
Because of the large principal of other long-term debts, usually they have features that allow the borrower to pay the debts by
installments from a single maturity date.

The current portion of such debt is considered as current liability, yet the remaining debt may be due many years from now.

5. Other Payables. These are payables that can be paid within a year but do not fall on the classifications listed above. The
examples are dividends payable and interest payable, and payables arising from lawsuits.
Noncurrent Liability

Noncurrent liabilities form the residual portion of liabilities. By strict definition, 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. (Florendo 2016) Let us be
acquainted with the term related to concurrent liability.

Bonds Payable. These are more formal than notes payable. Often in huge sums and in long term debt contained in an agreement
called as bond indenture. It has stated interest rates which may differ from prevailing market interest rates, causing their fair values
to change from time to time. Moreover, they are usually issued by the banks, government and huge corporations. Term bonds are
bonds which have principal that mature in a single date. Serial bonds are bonds that mature in multiple dates.

3. EQUITY / OWNER’S CAPITAL / STOCKHOLDER’S EQUITY

After deducting liability, the equity is the residual interest of the owners in the assets of the business.

To illustrate the concept, assuming you want to start a business to provide your family in this pandemic. The problem is you
don’t have assets like materials, equipment, raw materials etc. to start a business. Hence, you borrowed cash from a lending
institution. Technically you and the lending institution are the owners of the business. Since you have the obligation to pay for the
loan, the lending institution has a greater claim for the asset of the business. To know how much you own in your business, you
must deduct the amount that you need to pay for the lending institution from the total asset of your business.

Equity is called owner’s capital in the case of a sole proprietorship or a partnership. It is called shareholders’ equity or
stockholders’ equity in the case of a corporation.

Let us be acquainted with the terms related to equity

1. Common Stock
A common stock is a security which represents ownership in a corporation. Those who own a common stock of a
corporation are called common stockholders. (Florendo 2016) A common stockholder has many rights among which
are the following:
a) Right to vote in the stockholders’ meetings
b) Right to receive dividends
c) Pre-emptive right which is the right to be offered first to buy additional shares in the event of a future issuance.

All common stock comes with a par value. This is the legal nominal value assigned to it, and it is illegal for it to be issued for less
than this price.”

2. Preferred Stock It represents the number of preferred shares issued and outstanding multiplied by the stock’s per value.
It represents ownership in a corporation. Preferred stockholders are owners of the preferred stock/s. Common stocks and preferred
stocks differed in some ways like in preferred stocks’ preference as to corporate dividends and/or liquidation. For example, if the
corporation declares dividend, the preferred stockholders are given priority compared to common stockholders. Preferred shares
always come with a stated interest and par value.

3. Additional Paid-in Capital

It is also called share premium. Additional paid-in capital is the excess over par-value contributed by the business’
shareholders in a stock issue.

4. Retained Earnings. Retained earnings represent the accumulated net income from operations over several periods. It is a
measure of how much the company earned since day one of its operations. Sometimes, a company’s investors (or shareholders) will
want to reap the benefits of their investments. (Florendo 2016)When the company gains or progress over several periods, they give
back to its shareholders and declares dividends. This action will decrease the retained earnings.

4. INCOME/REVENUE

The equity will increase because of the result of income, revenues, gains, or capital contributions. Revenues according to
Joselito G. Florendo from his book Fundamentals of Accountancy, Business and Management 1, are the amounts received by a
business earned as a result of selling something or rendering a service.

Revenues are recognized when incurred and when entity already incurs the related expenses.
 For example, you are an online seller selling face shields. Your customer paid you in advance even though the products is
not yet delivered. Only when you already incurred the expenses while delivering the face shields and after paying the supplier only
then you can recognize your revenue. The cash that you received is called deferred revenue and is considered a liability.

Revenues can be classified as follows:

1. Operating Revenue – These are the revenues originated from main business operations like sales, service revenue etc.
2. Non-operating Revenue – These are results of some activities like interest revenue, rent revenue of a business not
engaged in the renting industry) which do not originate from the main business operations.

Examples of revenue accounts are the following:

1. Sales Revenue – main source of revenue for business for selling products
2. Service Revenue – main source of revenue for business that renders services
3. Interest Revenue – revenue earned as a result of investment in debt securities or receivables from other entities
4. Dividend Revenue – revenue earned as a result of dividend declaration of a company where in a business has invested
stocks.
Gains according to Joselito G. Florendo from his book Fundamentals of Accountancy, Business and Management 1, are
increases in equity as a result of non-recurring activities orthe increase in value of investments. Non-recurring includes the sale of
company noncurrent asset. For example, a jewelry shop wants to expand its business. Since it does not have enough fund, the
owner decides to sell some of its jewelries. Take not that the value of the jewelries increase as time passes by, hence there is an
increase of investments. The increase of its investment is called gain.

5. EXPENSES

Expenses are the amount that a company consumed so that it can operate. They are the result of pursuing to generate
more income for the business. Just like revenues, it is a result of the day-to-day operation of the business but not necessarily that an
expense will be the amount of cash used up in a given period.

Examples of Expenses accounts are the following:

1. Cost of goods sold – when inventory is sold, the cost of goods sold reflects what the company incurred to make the
inventory sell (in manufacturing companies) or to buy them (in merchandising companies)
2. Utility Expense – it includes the water and electricity used by the company to be paid to the utility companies like
NORECO and Sibulan Water District
3. Depreciation Expense – Mostly due to the using of equipment and building
4. Office Supplies Expense – a result of purchasing office supplies
5. Insurance Expense – it is a result of paying insurances
6. Salaries Expense – it is a result of recognizing the hard work of the employees by paying them monthly salaries
7. Bad Debt Expense – an estimate of how much accounts receivable the company will not be able to collect
8. Interest Expense – When you borrow money, there is an interest that you must be paid that added to the principal
amount borrowed.

PREPARING THE CHART OF ACCOUNTS

Preparing chart of accounts is like washing your laundry. First, you should know your clothes well. Second, you will classify
them according to their color. Lastly you will identify what method to use whether you hand wash it or put it inside a washing
machine so that when you wash your clothes everything will be smooth and perfect. Hence this SLK will help and guide you on how
to make your chart of accounts so that when you will make your financial statements or books in the future everything will be
smooth and organized.

You will know the different steps on how to prepare the chart of accounts. You will also know the importance of chart of
accounts in every business. But you need to identify first the different accounts according to the five major accounts namely assets,
liability, equity, income and expenses. You need to familiarize yourself with the accounting equation.

THINGS TO REMEMBER!
Accounting Equation
ASSET = LIABILITIES + CAPITAL

ASSETS REVENUES EXPENSES

1. Cash 1. Sales 1. Cost of Goods Sold
2. Accounts Receivable 2. Interest Revenue 2. Salaries Expense
3. Inventories 3. Dividend Revenue 3. Utility Expense
4. Land 4. Depreciation Expense
5. Furniture 5. Office Supplies Expense
6. Equipment
EQUITY
LIABILITIES 1. Common Stock
1. Accounts Payable 2. Preferred Stock
2. Notes Payable 3. Additional Paid-in Capital
3. Accrued Liabilities 4. Retained Earnings
4. Other Payables

CHART OF ACCOUNTS

A chart of accounts is a listing of all accounts used by a company in its operations. (Florendo, 2020) Moreover, it is the
foundation of the financial statements and helps us identify where the money is going and coming from. It also eradicates the need
of remembering every single account that the company maintains.

Steps in the preparation of the basic chart of accounts:

1. Create columns (Discretion of the company. They can have two or more columns. They might add additional column for
additional information about the account.)
2. Remember the accounting equation ASSETS = LIABILITITES + CAPITAL. The order must be first the assets, then the
liabilities, then capital, then the revenue and lastly the expenses.
3. List all the assets, liabilities, equity, revenue and expenses account in the first column.
4. On the second column, choose an account code (The account code may vary depending on the company on whatever
account code they will use.)
5. On the third column, write the description for each account on when to use it. (Other chart of accounts does not have
third column. They have two columns only for account code and account name.)

Example of a chart of accounts:

MICMAC Corporation
Chart of Accounts

Account Account Code Description

ASSETS
Cash 100 Use for actual cash transaction
Accounts Receivable 120 Use for customers who will borrow and pay in the future
Inventory 130 Use for items on sale and raw materials
Prepaid Expenses 140 Use for advance payments
Supplies 150 Use for items to be used in the future
Office Equipment 160 Use for equipment that are used in the office
Store Equipment 170 Use for equipment that are used in the store
Land 180 Use for land used in operations

LIABILITIES
Accounts Payable 200 Use for the payables/debts of the company
Notes Payable 210 Use for promissory notes issued by the company
Salaries Payable 220 Use for salaries to be paid monthly

CAPITAL
Owner’s, Capital 300

REVENUES
Sale 400 Use for earnings
Service Revenue 500 Use for earnings

EXPENSES
Salaries Expense 600 Use for salaries incurred, regardless of payment
Utilities Expense 610 UPse for electricity, water and internet connection expenses incurred