Chapter 4:

Types of Major
Accounts
Learning
Objectives
1.State the five major
accounts.
2.Give examples of each
major accounts.

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 The
Account is the basic storage of information in accounting. It is
Account a record of the increases and decreases in a specific item of
asset, liability, equity, income or expenses.
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.

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4
The Five
Major The five major accounts, also called the
Accounts 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.

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The Five
Major 2. LIABILITIES – are your present obligations
that have resulted from past events and can require
Accounts 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.

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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.

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EXAMPLE
Your business sells barbecue. The income you derive from
1: 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 ₱2,000 in your books
of account. You were able to sell the old umbrella for ₱2,200.
The difference between the 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 not your main
business (not your ordinary business activity).
*Carrying amount refers to the net amount at which an item is
carried (i.e., recorded) in the books of accounts.

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The Five
5. EXPENSES – are decreases in economic benefits
Major during the period in the form of decreases in assets, or
Accounts 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 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.

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EXAMPLE
In your barbecue business (see example 1), the cost of the
2: barbecue you have sold is an expense.
if you were able to sell the old umbrella with
carrying amount of ₱2,000 for only ₱1,600, the difference
now of ₱400 represents a loss (₱1,600 - ₱2,000 = ₱400
loss).
NOTES:
⮚ If selling price is greater than the carrying amount,
the difference is a gain.
⮚ If selling price is less than the carrying amount, the
difference is a loss.

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Classification of
the Five Major
Accounts The five major accounts are classified according
to the financial statement where they appear as
follows:

BALANCE SHEET INCOME STATEMENT

ACCOUNTS ACCOUNTS
1. ASSETS 1. INCOME
2. LIABILITIES 2. EXPENSES
3. EQUITY

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⮚ 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.

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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:

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Account numbers are assigned to the accounts to
facilitate recording, cross-referencing, and retrieval
of information.

Each business shall formulate a chart of accounts

that best suits its needs

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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

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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.

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.

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 That’s a lot of money

3. The third digit in the 3-digit numbering, if not zero, signifies that the account is
a contra account or an adjunct accountª to a related account.

Total success!

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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).

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Common The following are the common account titles and their
Account descriptions.

Titles BALANCE SHEET ACCOUNTS

ASSETS

⮚ Cash includes money or its 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 of estimated losses
from uncollectible accounts receivable. Another term is
“allowance for doubtful accounts.”

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

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⮚ Equipment- consists of various assets such as:
a. Machineries and other factory equipment
Transportation equipment, e.g., vehicles, delivery trucks
b. Office equipment, e.g., desks, cabinets, chairs
Computer equipment, e.g., server, personal computers, laptops
Furniture and fixtures, e.g., desks, cabinets, movable partitions

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⮚ 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.”

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Common LIABILITIES
Account ⮚ Accounts payable - obligations supported by oral or
Titles 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.

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 “Accounts” vs. “Notes”: You go to a sari-sari store and tell the owner,
“Aling Nena, 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.

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⮚ 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 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.)
⮚ 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.

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Common
EQUITY (Capital, Net assets or Net worth)
Account
Titles ⮚ Owner’s capital (or Owner’s equity) – the residual
amount after deducting liabilities from assets.

The Owner’s Capital account is

INCREASED by: DECREASED by:
⮚ Investments or ⮚ Withdrawals or
contributions by the owner. distributions to the owner.
⮚ Income or Profit earned by ⮚ Expenses or Loss incurred
the business. by the business.

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⮚ 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.

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Common
INCOME STATEMENT ACCOUNTS
Account
INCOME
Titles
⮚ 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.

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Common EXPENSES

Account ⮚ Cost of sales (or Cost of goods sold) – represents the value of
inventories that have been sold during the accounting period.
Titles 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 (eg. Electricity, water,
telephone, internet, cable TV, etc.) that have been used during the
accounting period.

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⮚ 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 – 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).

For corporations and partnerships, income taxes are recorded in a separate account
called “Income tax expense.”

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⮚ 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,
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.
▪ Interest expense and interest income are opposites. For 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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⮚ 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.

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Drills on ASSET ACCOUNTS

Account Accounts Receivable

❖ A customer bought barbecue worth P500 from your barbecue
Titles business. He told you that he will pay for it next week.

▪ The P500 collectible from the customer is recorded as

accounts receivable.

Allowance for bad debts (Allowance for doubtful accounts)

❖ The customer with the P500 account receivable is broke. You have
estimated that you can only collect P420 from him.

The P80 (500- 420) uncollectible account is recorded as bad debts

expense and accumulated in the allowance for bad debts account.

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Notes receivable
❖ Your friend borrowed P1,000 from your barbecue business. You required from
him a written promissory note to repay the money within 30 days plus 1%
monthly interest.
▪ The P1,000 collectible from your friend is recorded as notes receivable.

Inventory
❖ You purchased pork worth P1,000 to be marinated and sold as barbecue.
▪ The cost of the pork purchased is recorded as inventory.

Prepaid supplies
❖ You purchased table napkins worth P200 to be used in your barbecue operations.
▪ The table napkins, while still unused, are assets recorded as prepaid
supplies. When used, they are recorded as supplies expense.

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Prepaid rent
❖ You are renting a space for your barbecue stand. The lease contract
required you to pay P10,000 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’).

Equipment
❖ You purchased a barbecue grill worth P1,000.
▪ The barbecue grill is an asset recorded as equipment.

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Accumulated depreciation – Equipment
❖ You expect to use the barbecue grill for 5 years.
▪ The cost of the barbecue grill will be allocated over the 5-year
period that you will be using it. The amount allocated each called the
“depreciation expense.”
The depreciation expense per year is P200 (P1,000 ÷ 5 years). Thus,
after a year, the accumulated depreciation of the equipment will be P200
(P200 x 1 yr.); after two years, the accumulated depreciation will be
P400 (P200 x 2 yrs.); after three years, P600 (P200 x 3 yrs.), etc.
In accounting, depreciation means an allocation of cost over the
periods where a depreciable asset is used.

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Notes:
⮚ The cost of equipment or similar item that is expected to be
used over more than one accounting period is initially
recorded as an asset.
The cost of this asset is then allocated over the periods in which
the equipment is expected to be used.
The portion of the cost that is allocated to the current period is
called depreciation expense.
The total depreciation expenses recognized since the equipment
was acquired is piled up in the accumulated depreciation
account.

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Drills on LIABILITY ACCOUNTS

Account Accounts payable

❖ You ran out of inventory of barbecue, so you went to Mr. Porky’s
Titles Meat Shop to buy pork. You don’t have the available cash, so you
promised orally that you will be paying for the pork, worth P500,
next week.
▪ The P500 payable is a liability recorded under accounts
payable.
Notes payable
❖ Remember your P1,200 loan from Mr. Bombay? Well, he required
you to write a promissory note to repay the borrowed money at some
future date.
▪ The P1,200 payable is a liability recorded under notes
payable.

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Interest payable
❖ Your loan from Mr. Bombay requires repayment within 30 days plus 20% monthly
interest (‘five-six’). At the end of 30 days, you will be incurring interest expense of
P240 (1,200 note payable x 20% interest rate).
▪ Prior to paying the interest, the accrued interest is recorded as interest payable.
Salaries payable
❖ By month-end, total salaries earned by an employee during the month amounted to
P8,000. However, the employee has not yet claimed the salary.
▪ The unpaid salary already earned by the employee is recorded as salaries payable.
Utilities payable
❖ Your electricity bill for the month of January amounted to P2,000. The bill is not yet
paid.
▪ The unpaid utility already used but not yet paid is recorded as utilities payable.

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Unearned income
❖ You received an order of barbecue worth P800. The customer paid the
sale price but instructed you to deliver the barbecue next week.
▪ Right now, the sale price collected is not yet earned (i.e.,
unearned) because the barbecue is not yet delivered. Thus, the cash
collection is initially recorded as liability (i.e., unearned income) and
will be transferred to income (i.e., sales) next week when the barbecue
is delivered.
The account titles “Advances from customers” or “Unearned
revenue” may be used in lieu of the “unearned income” account.

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Drills on EQUITY ACCOUNTS
Account
Owner’s capital
Titles ❖ You invested P800 to your barbeque business.
▪ Your P800 investment is recorded in the Owner’s
capital account.

Owner’s drawings
❖ You made temporary withdrawals of P200 from your
barbeque business.
▪ Your P200 withdrawals are recorded in the
Owner’s drawings account.

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Drills on INCOME ACCOUNTS

Account Sales
Titles ❖ You sold barbecue worth P500.
▪ The sale is recorded in the Sales account.
▪ For the provision of services, as opposed to sale of goods,
the income account used is the Service fees account.

Interest income
❖ After a month, you will have earned the 1% monthly interest on
the loan you have extended to your friend. (See Notes
receivable’ above.)
▪ The interest earned is credited to the interest income
account.

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Drills on EXPENSE ACCOUNTS

Account Cost of sales or Cost of goods sold

Titles ❖ The cost of the barbecue that was sold for P500 is P300.
▪ The P300 cost is expensed as Cost of sales or Cost of
goods sold.

Freight-out
❖ Your business has a hotline. Customers can order barbecue
through phone call, text message, or Facebook Messenger. No
delivery charges. During the period, the cost of gasoline for your
motorcycle, attributable to delivering barbecue to customers,
amounted to P100.
▪ The delivery costs of P100 are recorded as freight-out.

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Salaries expense
❖ You hired a helper in your barbecue business. Your employee earns
compensation of P8,000 per month.
▪ At the end of each month, you will record the P8,000 earned by the
employee as salaries expense.
Rent expense
❖ You are renting a space for your barbecue stand. The rent is P5,000 per
month.
▪ At the end of each month, you will record rent expense of P5,000.

Utilities expense
❖ After a month of operations, your business received electricity bill of P2,000
and water bill of P200.
▪ The electricity and water bills are recorded as utilities expense.

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Supplies expense
❖ The cost of table napkins used during the period amounted to P50.
(See also Prepaid supplies’ above)
▪ The cost of the supplies used is recorded as supplies expense.

Bad debt expense

❖ Of your total accounts receivable of P500, you expect to collect only
about P480.
▪ The P20 uncollectible balance is recorded as bad debt expense.
(See also ‘Allowance for bad debts’ above)

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Depreciation expense
❖ The P1,000 cost of the barbecue grill will be allocated over the 5
years that you will be using it. The amount allocated each year is
called the “depreciation expense.” The depreciation expense per year
is P200 (P1,000 ÷ 5 years). (See also ‘Accumulated depreciation’
above.)
▪ At the end of the year, you will record the allocated cost of the
barbecue grill of P200 as depreciation expense.

Advertising expense
❖ You paid Justin Bieber P5,000 to endorse your barbecue business.
▪ The P5,000 payment is recorded as advertising expense.

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Insurance expense
❖ You have obtained a one-year, fire insurance for your barbecue stand for
P12,000.
▪ The used up portion of the insurance is recorded as insurance
expense.

Taxes and licenses expense

❖ During the period, you paid local taxes amounting to P500.
▪ The local taxes paid are recorded as taxes and licenses.

Interest expense
❖ (See ‘Notes payable’ and ‘Interest payable’ above)
▪ At the end of the month, you will record P240 interest expense.

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Loss
❖ Your barbecue grill is stolen! Oh no!
▪ The carrying amount of the stolen barbecue grill is
charged as a loss. The carrying amount is computed as
“Acquisition cost minus Accumulated depreciation.” The
cost of the barbecue grill is P1,000. If the accumulated
depreciation is P400, the carrying amount is P600 (1,000
– 400).

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