Chapter 8: Types of Major

Accounts
At the end of this chapter, you should be able to;
Discuss the five major accounts
Cite examples of each type of account
Prepare a chart of accounts
Accounting Equation
ASSETS = LIABILITIES + EQUITY
REVENUES AND EXPENSES
What makes up assets?
What composes liabilities and Equity?
ACCOUNTS –
ASSETS
- is a resource controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the
entity/business.
ASSETS
Types of Assets
1. 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.
2. NON-CURRENT ASSETS - A
noncurrent asset is an asset that
is not expected to turn to cash
within one year.
Current Asset - CASH
Cash – the most basic and familiar of all assets. Cash is money
owned by the company. Cash kept in the company’s premises
is called Cash on hand. Cash on hand includes bills, coins, and
bank checks. Checks are reported as part of cash because
these documents are accepted as payments and deposits.
Cash in bank refers to money in the bank which can be kept in
a savings or checking account.
Cash Equivalents are technically not cash because it is not
immediately available for use. (Time deposits with term
maturities of ninety days or less)
Current Asset – ACCOUNTS RECEIVABLE
Accounts Receivable – are oral promises to the entity/business
to receive cash at a later date.
A/R are usually current assets that result from selling goods or
providing services to customers on credit. Accounts receivable
are also known as trade receivables.
Nontrade receivables or other receivables
Examples: Interest Receivable, Receivables from employees
Contra-Asset Account is a negative asset
account that offsets the asset account with
which it is paired.
Allowance for doubtful accounts/ Bad debts
Allowance is a contra-asset account.

The allowance for doubtful accounts is a contra-

asset account that records the amount of
receivables expected to be uncollectible.
** Contra means against
Current Asset – Short Term Investment
• 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.

**liquid – easily and quickly

convertible into cash.
 Current Asset – Notes Receivable
• Notes Receivable account represents
promises to the entity to receive cash at a
later, with the main distinction that notes
receivable are all written, and hence, more
formal than accounts receivable.
• Are also sometimes called Promissory
Notes.
PN is a legal document that says the
borrower promises to pay, on scheduled
payment dates, a specific sum called
principal and interest based on principal
and stated interest rate.
Current Asset - INVENTORIES
Inventory is the term for
the goods available for
sale and raw materials
used to produce goods
available for sale. It also
includes work-in-process
items and supplies.
Current Asset - Prepayments

Prepayment is an amount simply paid in

advance for goods or services anticipated
to be received by the entity in the future.
Examples; Rent (Prepaid Rent), Insurance
(Prepaid Insurance), Supplies
Noncurrent Assets
Noncurrent assets are assets other than the current
assets. While current assets are assets which are
expected to be converted to cash within the next 12
months or within normal operating cycle of a business.
In other words, these are assets which are expected to
generate economic benefits over more than one year.
Non current assets are illiquid or not easily converted
into cash.
Noncurrent Asset - Investments

Perhaps the most liquid of the noncurrent assets,

the investments account includes all the
company’s investments which does not expect to
realize within 1 year.
Examples; Investments in real estate, long-term
notes, government treasury bills, and funds set
aside for long-term purposes.
 Noncurrent Asset – Fixed Assets
Fixed assets are what can be called as the
most tangible, longest serving assets a
company can have. They are expected to
not be converted into cash immediately,
and are regularly placed as means of
production.
Also called as Property, Plant and
Equipment. It includes land, land
improvements, buildings, machineries,
equipment, furniture and fixtures.
Contra-Asset Account – Accumulated
Depreciation
Fixed assets, with the exception of land, also gradually
deteriorate with the passage of time, through usage,
normal wear and tear, and obsolescence, Such
deterioration is more properly termed as depreciation, a
form of expense.

Accumulated Depreciation - contra asset account

records the depreciation to date of a fixed asset.
Noncurrent Assets – Intangible Assets
Intangible assets are assets that lack physical substance,
and yet are similarly realizable over long periods of
time.
Examples include patents, copyrights, franchises,
goodwill, trademarks and licenses. Often they are
simply represented by written documents or certificates
stating their description and ownership status.
Noncurrent Assets – Other assets
Other assets – all remaining items which do not fall into
any of the accounts mentioned. Assets that are unique
and hard to classify.

** As a practical consideration, it is favorable to limit

the usage of this account to encourage more distinct
classifications.
Classify the following a current or noncurrent
asset
1. Inventories
2. Accounts Receivable
3. Intangible Assets
4. Prepayments
5. Fixed Assets
6. Cash Equivalents
LIABILITIES
- Claims of external parties from the entity. They are
the debts of the entity/business to external creditors.
Payment may be in cash, goods or services.
Liabilities
Types of Liabilities
1. Current Liabilities – liabilities which are expected to
be settled or paid out by the entity within 12
months.
2. Noncurrent Liabilities – 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.
Current Liabilities – Accounts Payable
Accounts Payable is the opposite of Accounts Receivable. While in
Accounts Receivable, the entity is on the receiving side, the entity
is now on the paying side, hence, the borrower.
- Borrowings involved in company’s production process (purchase
of raw materials, inventories)
- Borrowing through accounts payable foregoes available cash
discounts and the entity has to pay full invoice price (if it pays at
due date) or an amount of significantly lesser discount (if it pays
at a date earlier than maturity).
Credit Terms
Most suppliers give credit terms of 30 to 90 days.

*Credit Term 2/10, n/30 (reads: two ten net

thirty) – means payment is due on 30 days but a
2% discount may be taken if paid within 10 days
(after delivery).
Current Liabilities – Notes Payable
Notes Payable are written promises of the entity to pay a sum of
certain in a future determinable time.
• Opposite of Notes receivable
• Notes Payable pay interest regularly, either applied through discount,
or through fixed periodic payments stated in the written agreement.
• Upon Maturity = Full amount of the principal + Accrued interest
• Notes Payable can be paid in lump sum or installments
Current Liabilities – Accrued Liabilities
Accrued Liabilities are all other accounts which the company
should pay, arising from the course of the business.
• Accrued Expenses - unpaid expenses of the company.
Examples of Accrued expenses are Salaries payable, Utilities
payable, Rent Payable, Interest Payable.
• Unearned Revenue – it is related to goods or services that
the entity has yet to deliver, but has already received
payment from a customer.
Current Liabilities – Current portion of Long-
Term Debts
• These are long-term debts payable within the
coming year.
• The borrower can pay on an installment basis.
• The current portion of such debt is considered a
current liability
Current Liabilities – Other Payables

Other Payables include those which are due

from the entity outside the normal course of
its business.
Examples; Dividends payable, interest
payable
Noncurrent Liabilities – Bonds Payable
• More formal than Notes Payable. These are form of
long-term debt, often in huge sums, contained in an
agreement called as the bond indenture.
• Bonds are usually issued by the government, banks,
and huge corporations seeking huge financing sources
• Bonds are considered the largest sources of funding for
most businesses, next to the owner’s capital.
EQUITY/OWNER’S CAPITAL/STOCKHOLDERS’
EQUITY
EQUITY
Equity is the residual interest of the owners in the assets of the business
after considering all liabilities.
The owners equity is simply the owner’s share of the assets of a business.
Sole Proprietorship Partnership
Owner’s Capital
Account Title/Name; Name of the owner followed by a comma and the
word, Capital. John Lee, Capital
Account Title/Name; Name of the owner followed by a comma and the
word, Drawing. John Lee, Drawing
Corporations – Shareholders’ equity or Stockholders’ Equity
Shareholders’ Equity
Components of Shareholders’ Equity section of the
Balance Sheet usually has;
• Common Stock Account
• Preferred Stock Account
• Additional Paid-In Capital Account
• Retained Earnings Account
Common Stocks and Preferred Stocks
A common stock and a preferred stock is a security
which represents ownership in a corporation. Those
who own common stock of a corporation are called
common stockholders and owners of preferred stocks
are called
All common stock comes with a par value or stated
value. Preferred shares almost always come with a par
value and a stated interest.
Additional Paid-in Capital & Retained
Earnings
• Additional Paid-in Capital - Also called Share premium, is the excess
over par value contributed by the company’s shareholders in a stock
issue.

• Retained earnings (RE) is the amount of net income left over for the
business after it has paid out dividends to its shareholders.
Revenues
Revenues are the amount received by a business as a result of
selling something or rendering a service. It is the increases in
equity as a result of day-to-day operations.

Classification of Revenues
1. Operating Revenue – revenues that originate from main
business operations. Examples are sales, service revenue
2. Non-operating revenue – result of some side activities.
Examples are interest revenue, rent revenue of a business not
engaged in the renting industry.
Examples of Revenue accounts

1. Sales Revenue or Sales

2. Service Revenue
3. Interest Revenue
4. Dividend Revenue
5. Contributions Revenue
Gains

Gains are increases in equity as a result of

non-recurring activities or the increase in
value of investments.
Non-recurring activities include the sale of
company noncurrent assets.
Expenses
Expenses are the amounts consumed by the business to operate. They are the
result of attempting to generate revenues.
Examples are;
1. Cost of Goods Sold/Cost of Sales
2. Utility Expense – Water and electricity(Meralco, Maynilad)
3. Depreciation Expense- result of using the building and equipment
4. Office supplies expense – result of using up office supplies
5. Insurance expense
6. Salaries Expense
7. Bad debts Expense – an estimate of how much accounts receivable the
company will not be able to collect
Losses and Distribution to owners
Losses are the direct opposite of gains. They are
decreases in equity as a result of non-recurring activities
or decreases in value of investments.

Distribution to owners is assets given to owners, usually

in cash. For corporations, they are called dividends.
Net Income

REVENUES AND GAINS

-
LOSSES AND EXPENSES
Chart of Accounts
• It is a listing of all accounts used by a company in its operations. It is
classified according to the five major accounts in the following order:
assets, liabilities, equity, revenues and expenses. It includes reference
numbers (account numbers) so they can be easily traced.