Far Lesson 4

Document no.
INTERNATIONAL SCHOOL OF ASIA AND THE PACIFIC ISAP-QMS-DCO-ILG (ACCTG 100)

Effective Date:
TITLE: SOLE PROPRIETORSHIP, PARTNERSHIP and
CORPORATION
September 2020
Revision No. 00
MAJOR ACCOUNTS, BOOKS

OF ACCOUNTS AND
BUSINESS TRANSACTIONS
LESSON 4
TYPES OF MAJOR ACCOUNTS (8 HOURS)
The Account
Account is the basic storage of information in accounting. Account is an accounting form of record in which
the effect of similar business transactions is grouped or classified. This is an accounting device to record the
increases and decrease of a specific asset, liability, owner's equity, revenue or expense.
An account could be in the form of a column on a spreadsheet, a separate card or piece of paper or a
specified location in a computer memory. The Journey and the Ledger are the book of accounts that are
commonly used in recording economic transactions and events.
TEACHER’S INSIGHT
 The journal, which is also called the books of original entry is an accounting book that is
used to initially record business transactions and events.
 The ledger, on the other hand, is an accounting book in which the accounts and their
related amounts recorded in the journal are posted and summarized periodically. This
accounting book in known as the "book of final entry” because the balance of sequence
contained in it are used to prepare the financial reports.
An account may be depicted through a “T-account.” A "T account is called as such because it resembles
the letter "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.
Revision No. Details Organizer Reviewer Approving Date Page No.

00 Original Subject Teacher Program Coordinator/Dean Academic Affairs September 2020 35 of 159
Document no.
Effective Date:
CORPORATION
September 2020
Revision No. 00
This is the “Account Title.”

Cash
Debit Credit The term “credit” (Cr.) simply refers to the right
1-Jan 500 side of the account. It is sometimes referred to as
3-Jan 1,000 800 4-Jan the “value parted with.”
Balance 700
The term “debit” (Dr.) simply The difference between the total debits and credits in the
refers to the left side of the account represents the balance of the account (500 + 1,000
account. It is sometimes referred – 800 = 700).
to as the “the value received.”
If the total debits exceed total credits, the account has a
debit balance. If total credits exceed total debits, the account
has a credit balance.
TEACHER’S INSIGHT
 The debit and credit side of the t-account must contain the amounts involved in accounting
transactions and their respective dates arranged in a chronological order.
The Five Major Accounts
The five major accounts, also called the elements of the financial statements, are actually the items in the
expanded accounting equation discussed in the previous chapter. Let us recall these items:
1. ASSETS - are the economic resources you control that have resulted from past events and can provide
you with future economic benefits.
2. LIABILITIES - are your 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
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
in the course of the ordinary activities of an entity.
Example 1:
Your business sells barbecue. The income you derive from selling barbecue is called revenue (ie, 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 ₱2,000
in your books of accounts. You were able to sell the old umbrella for ₱2,200. The difference between the
Document no.
Effective Date:
CORPORATION
September 2020
Revision No. 00
selling price of ₱2,200 and the carrying amount of ₱2,000, represents gain (₱2,200 - ₱2,000 = ₱200 gain).
This is because selling of umbrellas is your main business (not your ordinary business activity)
TEACHER’S INSIGHT
 *Carrying amount refers to the net amount at which an item is carried/ 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 distributions to the
business owner.
Expenses include both expenses and losses.

a. Expenses arise in the course of the ordinary activities of 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 barbeque business (See Example 1 above), the cost of the barbecue you have sold is an expense.
If you were able to sell the old umbrella with carrying amount of ₱2,0000 for only ₱1,600, the
difference now of ₱400 represents a loss (₱1,600 - ₱2,000 = ₱400 loss).
TEACHER’S INSIGHT
 If selling price is greater than carrying amount the difference is 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
TEACHER’S INSIGHT
 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 sub component 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 increases and decreases in an
accounting element an affected by business transaction are recorded in device called account name,
account title, or account.
Each accounting element is composed of several accounts which describe the related economic transactions
and events. To maintain a uniform account name, the business must have a listing of all the accounts it
uses to record economic transactions. This listing of all the accounts is called "Chart of Accounts."

Document no.
Effective Date:
CORPORATION
September 2020
Revision No. 00
The chart of accounts is usually arranged in the financial statement order that is, asset accounts first,
followed by liability accounts, owner's equity.
RALPH VINCE CORPORATION

Charts of Accounts
Account Account
Number Number
ASSETS: LIABILITIES:
110 Cash 210 Accounts payable
STATEMENT OF FINANCIAL
120 Accounts Receivable 220 Notes payable

POSITION ACCOUNTS
125 Allowance for Uncollectible Accounts 230 Interest payable

130 Interest Receivable 240 Salaries payable
140 Supplies 250 Utilities payable
150 Prepaid Rent 260 Unearned income
160 Land
170 Building EQUITY
175 Accumulated depreciation - Building 310 Ralph’s capital
180 Equipment 320 Ralph’s drawings
185 Accumulated depreciation - Equipment
EXPENSES INCOME
INCOME STATEMENT
510 Cost of sales 410 Service fees

520 Freight-out 420 Sales
ACCOUNT
530 Salaries expertise 430 Interest income

540 Rent expense 440 Gains
Account numbers are assigned to the 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.
Each business shall formulate a chart of accounts that best suits its needs. Large corporations may
have thousands of accounts and have more digits in their account numbers. Smaller companies may have
fewer accounts and fewer digits in their account numbers. As the number of accounts increases, the digits
in the account numbers also increase to accommodate the increased number of accounts.
The account titles in the chart of accounts shown above are numbered in the following manner:
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
EXPENSES 5

Document no.
Effective Date:
CORPORATION
September 2020
Revision No. 00
Thus, in the chart of accounts, the 3-digit numberings of all assets start with 1; the 3-digit numberings of all
liabilities start with 2, etc.
110 Cash
The first digit signifies that this account is an asset account.
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.
110 Cash
120 Accounts Receivable
The second digits refer to specific account titles and the
sequence on how they are listed in the chart of accounts.
3. The third digit in the digit numbering, if not zero, signifies that the account is a contra account or an
adjunct account to a related account.
170 Building
175 Accumulated depreciation - Building
The third digit signifies that this account, Accumulated
depreciation - Bldg. is a contra account to the Building
account.
TEACHER’S INSIGHT
 Contra Account are presented in the financial statements as deduction to their related
accounts.
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 Reed Chart of Accounts (RCA) issued by the Commission on Audit.
Common Account Titles
The following are the common account titles and their descriptions.
BALANCE SHEET ACCOUNTS
ASSETS
 Cash - includes money or its equivalent that is readily available for unrestricted use. Any item on hand
with monetary value that bank will accept for deposit and all amounts currently on deposit with the

Document no.
Effective Date:
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September 2020
Revision No. 00
bank in the name of the business. This includes coins and currencies, personal checks, money order,
traveler's checks made payable to the business and bank drafts. Also included are any funds that are
currently un deposit bank and readily available checking and savings account.
 Accounts Receivable - the counts collectible on open accounts of the customers These represent
debtors oral promise to pay a certain amount to the business and the right of the business to collect
that certain amount in peso. Examples are receivables from sales of goods or services.
 Allowance for bad debts - the aggregate amount of estimated losses from uncollectible accounts
receivable. Another term is "allowance for doubtful accounts."
 Notes Receivable - a promissory note/ written/ formal promise received by the business from its
debtors and/or customers promissory note is a s e promise to pay a certain amount on specified or
determinable date.
 Accrued Interest Receivable - the interest earned on note receivable but not yet received in cash.
 Inventories - assets held for sale in the normal operation of the business in the process of production
for sale or in the form of materials or supplies to be consumed in the production process or in the
rendering of services Temples are merchandise inventory, work in process inventory, and raw
materials inventory.
 Prepaid Supplies - these are various material which remains unused at the end of the accounting
period. Examples are unused coupon bonds, ink, ball pen, and janitorial supplies.
 Prepaid rent - rent paid in advance.
 Prepaid insurance - cost of insurance paid in advance
 Land - the site owned by the business on which the business building is constructed. This plant asset is
not subject to depreciation. All other plant assets are subject to depreciation.
 Building - the structure owned by the business used in the business operation.
 Accumulated depreciation-Building - the total amount of depreciation expenses recognized since
the building was acquired and made available for use.
 Furniture and Fixture - lying-lived items used by the business including store furnishings such as
showcases, counters, containers display a s well as furniture used for office purposes such as desks,
chairs, and cabinets.
 Equipment - consists of various assets such as:
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 computer laptops
e. Furniture and fixtures, e.g., desks, cabinets, movable partitions
TEACHER’S INSIGHT
 Office equipment and Furniture & Fixtures and 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.

Document no.
Effective Date:
CORPORATION
September 2020
Revision No. 00
TEACHER’S INSIGHT
 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.
TEACHER’S INSIGHT
 Accounts payable and accounts receivable are opposites. Meaning if I have an account
receivable from you, it means that you have an account payable to me. This is also true for
notes payable and notes receivable.
 Accounts" vs. "Notes": You go to a sari-sari store and tell the owner. "Aling Valen pautang
nga po ng isang lata ng sardinas, Pakilista." In here, Aling Nena has an account receivable
from you. On the other hand, you have an account payable to Aling Nena. It is an account
rather than a "note" because your promise to pay is made orally or informally (i.e., pakilista)
 Another example: You go to a bank to obtain a loan. The bank requires you to fill up a
formal and pre-printed form called promissory note. The promissory note will be notarized
by a lawyer and the corresponding documentary stamp taxes will be paid. In here, the bank
has a note receivable from you. On the other hand, you have a note payable to the bank.
This time, it is a “note” rather than an “account” because your promise to pay is made
formally or in writing.
 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 already earned by employees’ bur not yet paid by the business.
 Utilities payable - utilities (e.g., electricity, water, telephone, internet, cable TV, etc.) already used
but not yet paid.
TEACHER’S INSIGHT
 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.)
 Unearned 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.
TEACHER’S INSIGHT
 The word “receivable” connotes an asset, word “payable” connotes a liability.
 The word “prepaid” connotes an asset, while the word “unearned” connotes a liability:
EQUITY (Capital, Net assets or Net worth)

 Owner's Capital (or Owner's Equity) - the residual amount after deducting liabilities from
assets.
The Owner’s Capital account is

INCREASED by: DECREASE by:
 Investments  Withdrawals
 Income or Profit  Expenses or Loss
 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.
Document no.
Effective Date:
CORPORATION
September 2020
Revision No. 00
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 is “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. 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, eg. "Electricity expense, "Water expense, Technology and Communication
expenses 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 (eg. 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 - represents the cost of business and local taxes required by the government for
the conduct of business legs mayor's permit, other percentage taxes, community taxes). For
corporations and partnerships, income taxes are recorded in a separate account called "Income tax
expense."
 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 travelling on business trips, eg, 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 Interest
expense and interest income are opposites. For costs and borrowing costs. example, you will incur
interest expense on the money you borrowed from Mr. Bombay. On the other hand, Mr. Bombay will
earn interest income.
 Miscellaneous expense - represents various small expenditures which do not warrant separate
presentation
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September 2020
Revision No. 00
 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.
TEACHER’S INSIGHT
 The term “earned” relates to income, while the term "incurred" relates to expenses.
 The "unused” portion of a cost is an asset, while the "used" portion is an expense. For
example, the cost of unused office supplies is an asset (prepaid supplies), while the cost
of office supplies used during the period is expense (supplies expense).
Drills on Account Titles
ASSET ACCOUNTS
Accounts receivable
 A customer bought barbecue worth ₱100 from your barbecue business. He told you that
he will pay for it next week.
 The ₱100 collectible from the customer is recorded as accounts receivable.
Allowance for bad debts (Allowance for doubtful accounts)

 The customer with the ₱100 account receivable is broke. You have estimated that you
can only collect ₱84 from him.
 The ₱16 (₱100 - ₱84) uncollectible account is recorded as bad debts expense and accumulated in
the allowance for bad debts account. (See also ‘Bad debt expense’ below)
Notes receivable
 Your friend borrowed ₱200 from your barbecue business. You required from him a
written promissory note to repay the money within 30 days plus 1% monthly interest.
 The ₱200 collectible from your friend is recorded as notes receivable.
Inventory
 You purchased pork worth ₱200 to be marinated and sold barbecue.
 The cost of the pork purchased is recorded as inventory.
Prepaid supplies
 You purchased table napkins worth ₱40 to be used in your barbecue operations
 The table napkins, while still unused, are assets recorded prepaid supplies. When used, they are
recorded as supplies expense. (See also ‘Supplies expense’ below)
Prepaid rent
 You are renting a space for your barbecue stand. The lease contract required you to pay
₱2,000 rent in advance.
 The rent paid in advance is an asset recorded as prepaid rent. This amount will be charged as rent
expense when incurred (i.e., ‘used up’).


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Document no.

INTERNATIONAL SCHOOL OF ASIA AND THE PACIFIC ISAP-QMS-DCO-ILG (ACCTG 100)

MAJOR ACCOUNTS, BOOKS

2. Debit side - the left side of the account.

3. Credit side - the right side of the account.

Revision No. Details Organizer Reviewer Approving Date Page No.

This is the “Account Title.”

The Five Major Accounts

3. EQUITY - is assets minus Liabilities

Income includes both revenue and gains.

Expenses include both expenses and losses.

Classification of the Five Major Accounts

BALANCE SHEET ACCOUNTS INCOME STATEMENT ACCOUNTS

Revision No. Details Organizer Reviewer Approving Date Page No.

RALPH VINCE CORPORATION

120 Accounts Receivable 220 Notes payable

125 Allowance for Uncollectible Accounts 230 Interest payable

510 Cost of sales 410 Service fees

530 Salaries expertise 430 Interest income

Major types of Accounts Assigned Number

Revision No. Details Organizer Reviewer Approving Date Page No.

Common Account Titles

BALANCE SHEET ACCOUNTS

Revision No. Details Organizer Reviewer Approving Date Page No.

a. Machineries and other factory equipment

Revision No. Details Organizer Reviewer Approving Date Page No.

EQUITY (Capital, Net assets or Net worth)

The Owner’s Capital account is

INCOME STATEMENT ACCOUNTS

Allowance for bad debts (Allowance for doubtful accounts)

Revision No. Details Organizer Reviewer Approving Date Page No.

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