CHAPTER IV TYPES OF MAJOR OF ACCOUNTS

THE ACCOUNT
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

THE FIVE MAJOR ACCOUNTS

-also called as the elements of the financial statements. These are actually the items in the
expanded accounting equation discussed in the previous chapter.

1. ASSETS
- are economic resources you control that have resulted from past events and can
provide you with future economic benefits

2. LIABILITIES
 - are 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
- includes the interest of the owners on the business; claims of the owners on the
assets of the business; and the investment of the owner plus or minus the results of
operations. Owner’s equity or capital comes from two main sources – investment of
owners and earnings of the business.

4. INCOME
- is increases in economic benefits during the period in the form of increases in
assets, or decreases in liabilities, that result in increases in equity, excluding those
relating to investments by the business owner

Income includes both revenue and gains.

a. Revenue arises in the course of the ordinary activities of a business, e.g.,
sales and service fees
b. Gains represent other items that meet the definition of income and may or
may not arise I the course of the ordinary activities of an entity
Examples 1:
Your business sells barbecue. The income you derive from 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 books of accounts. 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 – P2,00 = 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 at which a item is carried (i.e., recorded) in the
books of accounts.

5. EXPENSES
- are decreases in economic benefits during the period in the form of decreases in
assets, or increases in liabilities, that result in decreases in equity excluding those
relating to distribution to the business owner

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 barbecue business (see Example 1), the cost of barbecue you have sold is an expense.
If you were able to sell the old umbrella with carrying amount of P2,000 for only P1,600, the
difference now of P400 represents a loss (P1,600 – 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 ACCOUNTS INCOME STATEMENT 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 subcomponent 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.

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:
Account numbers are assigned to t he 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.

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
EXPENSE 5

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.

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.
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);
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 Revised Chart of Accounts (RCA) issued
by the Commission on Audit (COA)

COMMON ACCOUNT TITLES

BALANCE SHEET ACCOUNTS

ASSETS
 CASH
- money or 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 amount 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
- lot on which the building of the business has been constructed or 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

- total amount of depreciation expenses recognized since the building was
acquired and made available for use

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

 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 are 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 – for interest, there must have been a passage of
time; for salaries, the services must have already been rendered; and for utilities, they must
have already been used.)

 UNEARENED 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.
EQUITY (CAPITAL, NET ASSETS OR NET WORTH)

 OWNER’S CAPITAL (or OWNER’S EQUITY)

- the residual amount after deducting liabilities from assets

 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 barbecue, sale of souvenir items,
etc.,)

 INTEREST INCOME
- revenues earned from the issuance of interest-bearing receivables

 GAINS
- income earned from the sale of assets (except inventory) or from 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’ costs 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.
A business can also have separate accounts for each type of utility, e.g.,
“Electricity expense,” “Water expense”, “Technology and Communication expense,” and
the like.

 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 portion of 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 EXPENSE

- represents 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).
 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 the costs incurred when traveling on business trips,
e.g., out-of-town travel costs of employees sent to seminars

 INTEREST EXPENSE
- represents the cost 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.

 MISCELLANEOUS EXPENSE
- represents various small expenditures which do not warrant separate presentation

 LOSSES
- expenses which may or may not arise from 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, and other calamities, decrease in the value of foreign currencies held due
to changes in exchange rates.