TYPES OF MAJOR

ACCOUNTS
Major types of accounts

• There are (5) major types of accounts as

components in the financial statements,
namely:
1. Assets
2. Liabilities
3. Capital or Owner’s Equity
4. Revenue or Income
5. Expenses
• The accounts in the assets, liabilities, and capital
(except for the drawings account) are called real
or permanent accounts. This is because these
accounts are carried forward to the next
accounting period.

• The accounts in the revenues or income and

expenses, including the drawing account are
called nominal or temporary accounts as these
are not carried over to the next accounting period
but are closed to the capital account at the end of
the accounting period.
• Accounts have its normal balances. When we say
normal balances, it means how it will appear
when it is summed up in the books accounts and
presented in the trial balance and financial
statements.
• There are only two normal balances of an
account in the books of accounts – it is either a
DEBIT or a CREDIT. When an account is
presented in the trial balance not on its normal
balance, it may have the following reasons that
an accountant should correct or make adjusting
entries:
1. There is unrecorded transaction
2. There is an error in the entries
3. There is a transaction or items in the
transaction needing reconciliation
4. A transaction may have been recorded
twice
5. There are errors in the posting process
Normal balances
• The following major types of accounts have its
normal balances:
a. Assets – the accounts classified in this type have
normal balances of a DEBIT, except for their
contra-assets account like Allowance for
Uncollectible Accounts and Accumulated
Depreciation which have normal balances of a
CREDIT but are presented in the assets portion.

• A DEBIT entry will increase as asset while a CREDIT

entry reduces it. It is the other way around when it
comes to the contra-asset accounts that have normal
credit balances.
b. Liabilities – the accounts classified in this
type have normal balances of a CREDIT.
A CREDIT entry will increase a liability
while a DEBIT entry will reduce it.
c. Capital – this account is normally a
CREDIT while the Drawings Account is a
DEBIT. When the capital account
becomes a debit balance, it is termed as
CAPITAL DEFICIT. A CREDIT entry
increases the capital account while a
DEBIT entry will reduce it and a DEBIT
entry will increase the drawings account
while a CREDIT entry will reduce it.
d) Revenues/Income – accounts that are
classified under this type have normal
credit balances of a CREDIT.

• On merchandising transactions, the SALES

account which is classified under this type
is a CREDIT, while the SALES
DISCOUNTS is a DEBIT and the SALES
RETURNS AND ALLOWANCES account is
also a DEBIT. A CREDIT entry increases
the revenues/income account while a
DEBIT entry reduces it.
e. Expenses – all expenses have normal
balances of a DEBIT.

• On merchandising transactions, the

PURCHASE account has a normal DEBIT
balance, while the PURCHASE DISCOUNT
account is a CREDIT balance and the
PURCHASE RETURNS AND
ALLOWANCES account is also a CREDIT
balance. A DEBIT entry increases the
expenses account while a CREDIT entry
reduces it.
1. Assets are resources controlled by the
entity as a result of past events and from
which future economic benefits are expected
to flow to the entity. (Framework/PAS)
The future economic benefits embodied in an
asset may flow to the entity in a number of ways.
For example, an asset may be: (Framework/PAS)

a. used singly or in combination with other assets

in the production of goods or services to be sold by
the entity;
b. exchanged for other assets;
c. used to settle a liability; or
d. distributed to the owners of the entity
An asset shall be classified as current when it
satisfies any of the following criteria:

a. it is expected to be realized in, or is intended for

sale and consumption in, the entity's normal
operating cycle.
b. it is held primarily for the purpose of being
traded,
c. it is expected to be realized within twelve
months after the balance sheet date; or
d. it is cash or a cash equivalent (as defined in IAS
7 Cash Flow Statements) unless it is restricted
from being exchanged or used to settle a liability,
for atleast twelve months after the balance sheet
date.

All other assets shall be classified as non-current.

(Framework/PAS)
Typical asset accounts (account titles)
include:
• Cash – includes money and other negotiable
instruments (checks and drafts) that are payable
in money and acceptable by the bank for deposit
or encashment. Money is the standard medium of
exchange. It refers to the currency – coins and
paper money which are legal tender and in
circulation.
• Accounts Receivable – this represents
collectibles (money owed to the company) for the
goods and/or services it has provided to
customers on credit (on account).

• Notes Receivable – this is similar in nature to

accounts receivable but it is supported by a
written promissory note (often a short-term loan
that carries interest).
Inventories - are assets:

a. held for sale in the ordinary course of business

b. in the process of production for such sale
c. in the form of materials or supplies to be
consumed in the production process or in the
rendering of services
Deferred Expenses (Prepaid Expenses or
Prepaid Assets) – these are payments that have
been made for goods or services that are expected
to be used or consumed in the revenue-earning
process. Typical prepaid expenses include:
• Office Supplies – stationery and other items
purchased for office and operation use.
• Prepaid rent – rent paid in advance to
property owners or lessors.
• Prepaid insurance – premium paid for
insurance coverage.
• Property, Land, and Equipment (except
land)
Accrued Incomes – incomes that have been
earned by the end of the current accounting period
but will be collected in the future accounting
period. Typical accrued incomes include:

• Commission receivable – represents

commission already earned but not yet
collected from the customers.

• Interest receivable – represents interest

already earned but not yet collected from
borrowers.
Property, Plant and Equipment – these are physical
properties used in operations that have a useful life longer
than one year.
• Land – the land owned by the company on which
the company’s building or plants are built on.

• Building (Plant) – this represents building/s that

company uses for its operations.

• Furniture, Fixtures and Equipment – this

represents the total furniture, fixtures, and
equipment or machineries used in the company’s
operations.

• Vehicles – delivery trucks, automobiles, etc. that the

company owns and uses for its operations.
2. Liabilities – are present obligations of the entity
arising from past events, the settlement of which is
expected to result in an outflow from the entity of
resources embodying economic benefits.
Framework/PAS
Settlement of an obligation may occur in a number of
ways, for example:
a. payment of cash
b. transfer of other assets
c. provision of services
d. replacement of that obligation with another
obligation
e. conversion of the obligation to equity

An obligation may also be extinguished by other

means, such as a creditor waiving or forfeiting its
rights.
A liability shall be classified as current when it satisfies
any of the following criteria:

• a. it is expected to be settled in the entity's normal

operating cycle,
• b. it is held primarily for the purpose of being traded;
• c. it is due to be settled within twelve months after the
balance sheet date; or
• d. the entity does not have an unconditional right to
defer settlement of the liability for at least twelve
months after the balance sheet date.

All other liabilities shall be classified as non-current.

(Framework/PAS)
Typical liability accounts (account titles)
include:

Accounts Payable – unwritten promises to pay

suppliers or trade creditors for assets purchased or
services received.

Notes Payable – formal written promises to pay

suppliers or lenders with specified sums of money
at definite future dates. Usually, these represent
the amounts that the company owes to creditors,
often short-term loans, which carries interest
expense.
• Accrued Expenses – are unpaid amounts for products or
services that are already used or consumed in the
revenue-earning process during the accounting period or
within the operating cycle. Typical accrued expenses
include:

• Salaries payable – unpaid salaries of employees for

work rendered
• Rent payable – unpaid rent to property owner or
lessor
• Taxes payable – taxes liability to government
agency
• Utilities payable – unpaid utilities used such as
telephone, electricity and water
• Interest payable – unpaid cost of money borrowed
from lenders
• Unearned Income (Unearned Revenue) – these
are payments received in advance from
customers for products or services to be provided
in the future.

• Loans payable – this account represents long-

term loans granted to the company by financial
institutions. Part of the long-term loan payable
that will be due within 1 year from the balance
sheet date shall be reported as current liability.
Mortgaged payable – these are usually long-term
loans that are backed up by collateral whether real
or personal properties. Part of the mortgaged
payable that will be due within 1 year from the
balance sheet date shall be reported as current
liability.
3. Equity – is the residual interest in the assets of
the entity after deducting all its liabilities.
Framework/PAS
Typical equity accounts (account titles)
include:
• Owner’s Equity or Owner’s Capital – this
account is used to record the initial and additional
investment of the owner of the business entity.

• Drawing or Withdrawal – this account is used to

record the cash or non-cash assets withdrawn by
the owner of the business entity.
Income Summary Account – this is a temporary
account used at the end of the accounting period
to record/close income and expense accounts.
This account shows the profit or loss for the
accounting period before closing to owner’s equity
account.
4. Income – is increases in economic benefits
during the accounting period in the form of inflows
or enhancements of assets or decreases of
liabilities that result in increases in equity, other
than those relating to contributions from equity
participants. Framework/PAS
Income represents revenue and gains earned by
the entity during the accounting period. Revenue
arises from the ordinary activities of an entity and
referred to as service fees, sales, interest,
dividends, royalties, and rent among others. Gains
represent other incomes that arise from the
ordinary activities or extra-ordinary activities of an
entity. Incomes (or revenues) are recognized when
earned regardless when they are collectible.
Typical income accounts (account titles)
include:

Service Income – represents revenue earned by

performing services to customer
Sales – revenues earned from sale of
merchandise
Commission – represents the amount or
percentage paid to an agent (a person or a
company) for a performance or business done
Other income – represents income that arises
from extra ordinary activities of the entity
5. Expenses – are decreases in economic
benefits during the accounting period in the form of
outflows or depletion of assets or incurrence of
liabilities that result in decreases in equity, other
than those relating to distributions to equity
participants. Framework/PAS
• The definition of expenses encompasses losses
as well as those expenses that arise in the course
of ordinary activities of the entity.

• Expenses that arise in the course of the ordinary

activities of the entity include, for example, cost of
sales, wages, and depreciation. They usually take
form of an outflow or depletion of assets such as
cash and cash equivalents, inventory, property,
plant and equipment.
• Losses include, for example, those resulting from
disasters such as fire and flood, as well as those
arising on the disposal of non-current assets. The
definition of expenses also includes unrealized
losses, for example, those arising from the effects
of increases in the rate of exchange for a foreign
currency in respect of borrowings of an entity in
that currency. Framework/PAS
• Expenses represent the amount of resources
used up by the entity to earn revenues during the
accounting period. Expenses are recognized
when incurred regardless when they are paid.
Common expense accounts (account
titles) include:
• Cost of Goods Sold or Cost of Sales – the cost
incurred to purchase or to produce the products
sold to customers
• Salaries and Benefits Expense – represents
payments of basic pay and other related benefits
of employees
• Telephone, Electricity and Water Expense –
represents payments for communication,
electricity and water used
• Supplies expense – represents stationery and
other supplies used in the daily operations
• Insurance expense – represents the expired
insurance premium paid for risk coverage

• Interest expense – represents time value of money

or the cost of money borrowed

• Depreciation expense – represents the portion of

the cost of tangible non-current asset allocated as
expense during an accounting period

• Bad Debts expense or Doubtful Accounts

expense – represents the amount of receivables
estimated to be uncollectible during an accounting
period
Chart of Accounts
• A Chart of Accounts is a created list of accounts
used by an organization to define each class of items
for which money or the equivalent is spent or
received. It is used to organize the finances of the
entity and to segregate assets, liabilities, capital,
revenue, and expenditures in order to give interested
parties a better understanding of the financial
activities of the business.
What is an ACCOUNT in Accounting?
• It is a record in the general ledger that is used to collect
and store debit and credit amounts from a transaction. To
summarize the same transactions into one, a specific
account is assigned to it. The accounts used in
accounting are commonly and generally accepted in the
accounting practice.
• The T-Account is the simplest form of an account
because you can summarize transactions through this
without using the general ledger book and can already
prepare a trial balance.
• It is literally a broad and very wide letter “T” with the debit
on the left side and credit on the right side.
END