FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT 1

Types of Major Accounts, Chart of Accounts

OBJECTIVES
At the end of the session, the learners are expected to
1. discuss the five major accounts;
2. cite examples of each type of account;
3. classify accounts according to the five major types; and
4. prepare a Chart of Accounts.

Types of Major Accounts (objectives 1&2)

The five types of major accounts are : ASSETS, LIABILITIES, EQUITY, INCOME and EXPENSES. These are the five elements
of financial statements. The three elements of financial accounting that report the status of an entity at a particular time
are assets, liabilities and equity. These are found in the Statement of Financial Position (Balance Sheet). The two
elements of financial accounting that report the performance or results of operation of an entity for a given period of
time are income and expenses. These are found in the Income Statement (Profit and Loss Statement).

Assets are the economic resources of a company that are expected to benefit the company’s future operations. Certain
kinds of assets – for example, cash and money that customers owe to the company (called accounts receivable) – are
monetary items. Other assets – inventorires (goods held for sale), land, buildings, and equipment – are nonmonetary,
physical items. Still other assets – the rights granted by patents, trademarks, and copyrights – are nonphysical.

Liabilities are a business present obligations to pay cash, transfer assets, or provide services to other entities in the
future. Among these obligations are amounts owed to suppliers for goods or services bought on credit (called accounts
payable), borrowed money (e.g., money owed on bank loans), salaries and wages owed to employees, taxes owed to the
government, and services to be performed. As debts, liabilities are claims recognized by law. That is, the law gives
creditors the right to force the sale of a company’s assets if the company fails to pay its debts. Creditors have rights over
owners and must be paid in full before the owners receive anything, even if payment of the debt uses up all the assets of
the business.

Owner’s equity represents the claims by the owner of a business to the assets of the business. Theoretically, owner’s
equity is what would be left if all liabilities were paid, and it is said o equal net assets. By rearranging the accounting
equation, we can define owner’s equity this way:
Owner’s equity = Assets – Liabilities

Owner’s equity is affected by the owner’s investments in and withdrawals from the business and by the business’
income and expenses. Owner’s investments are assets that the owner puts into the business (e.g., by transferring cash
from a personal bank account to the business’ bank account). In this case, the assets (cash) of the business increase, and
the owner’s equity in those assets also increases. Owner’s withdrawals are assets that the owner taken out of the
business (e.g., by transferring cash from the business’ bank account to a personal bank account). In this case the assets
of the business decrease, as does the owner’s equity in the business.

Simply stated, income and expenses are the increases and and decreases in owner’s equity that result from operating a
business. Generally, a company is successful if its income exceeds its expenses. When income exceeds expenses, the
difference is called net income. When expenses exceed income, the difference is called net loss. It is important not to
confuse expenses and withdrawals, both of which reduce owner’s equity. In summary, owner’s equity is the
accumulated net income (income less expenses) less withdrawals over the life of the business.

TYPICAL ACCOUNT TITLES USED UNDER EACH TYPE OF MAJOR ACCOUNT

ACCOUNTS IN STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

Accountants use special accounting terms when they refer to property and financial interests. For example, they refer to
property that a business owns as the business's assets and to the debts or obligations of the business as its liabilities.
The owner’s financial interest is called owner’s equity; sometimes it is called proprietorship or net worth. Owner's equity
is the preferred term.
Assets
Assets should be classified only into two: current assets and non-current assets. An entity shall classify an asset as
current when:
a. It expects to realize the asset, or intends to sell or consume it, in its normal operating cycle;
b. It holds the asset primarily for the purpose of trading;
c. it expects to realize the asset within twelve months after the end of the reporting period; or
d. the asset is cash or a cash equivalent unless it· is restricted from being exchanged or used to settle a liability for at
least twelve months after the end of the reporting period.
An entity shall classify all other assets as non-current. Operating cycle is the time between the acquisition of materials
entering into a process and its realization in cash or an instrument that is readily convertible to cash.

Current Assets
Cash. Cash is any medium of exchange that a bank will accept for deposit at face value. It includes coins, currency,
checks, money orders, bank deposits and drafts.
Cash Equivalents. These are short-term, highly liquid investments that are readily convertible to known amounts of cash
and which are subject to an insignificant risk of changes in value.
Notes Receivable. A note receivable is a written pledge that the customer will pay the business a fixed amount of money
on a certain date.
Accounts Receivable. These are claims against customers arising from sale of services or goods on credit. This type of
receivable offers less security than a promissory note.
Inventories. These are assets which are (a) held for sale in the ordinary course of business; (b) in the process of
production for such sale; or (c) in the form of materials or supplies to be consumed in the production process or in the
rendering of services.
Prepaid Expenses. These are expenses paid for by the business in advance. It is an asset because the business avoids
having to pay cash in the future for a specific expense. These include insurance and rent. These prepaid items represent
future economic benefits-assets-until the time these start to contribute to the earning process; these, then, become
expenses.

Non-Current Assets
Property and Equipment. These are tangible assets that are held by an enterprise for use in the production or supply of
goods or services, or for rental to others, or for administrative purposes and which are expected to be used during more
than one period. Included are such items as land, building, machinery and equipment, furniture and fixtures, motor
vehicles and equipment.
Accumulated Depreciation. It is a contra account that contains the sum of the periodic depreciation charges. The
balance in this account is deducted from the cost of the related asset-equipment or buildings-to obtain book value.
Intangible Assets. These are identifiable, nonmonetary assets without physical substance held for use in the production
or supply of goods or services, for rental to others, or for administrative purposes. These include goodwill, patents,
copyrights, licenses, franchises, trademarks, brand names, secret processes, subscription lists and non-competition
agreements.

Liabilities
An entity shall classify a liability as current when:
a. It expects to settle the liability in its normal operating cycle;
b. It holds the liability primarily for the purpose of trading;
c. the liability is due to be settled within twelve months after the end of the reporting period; or
d. The entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the
end of the reporting period. An entity shall classify all other liabilities as non-current.

Current Liabilities
Accounts Payable. This account represents the reverse relationship of the accounts receivable. By accepting the goods
or services, the buyer agrees to pay for them in the near future.
Notes Payable. A note payable is like a note receivable but in a reverse sense. In the case of a note payable, the business
entity is the maker of the note; that is, the business entity is the party who promises to pay the other party a specified
amount of money on a specified future date.
Accrued Liabilities. Amounts owed to others for unpaid expenses. This account includes salaries payable, utilities
payable, interest payable and taxes payable.
Unearned Revenues. When the business entity receives payment before providing its customers with goods or services,
the amounts received are recorded in the unearned revenue account (liability method). When the goods or services are
provided to the customer, the unearned revenue is reduced and income is recognized.
Current Portion of Long-Term Debt. These are portions of mortgage notes, bonds and other long-term indebtedness
which are to be pad within one year from the balance sheet date.

Non-Current Liabilities
Mortgage Payable. This account records long-term debt of the business entity for which the business entity has pledged
certain assets as security to the creditor. In the event that the debt payments are not made, the creditor can foreclose
or cause the mortgaged asset to be sold to enable the entity to settle the claim.
Bonds Payable. Business organizations often obtain substantial sums of money from lenders to finance the acquisition
of equipment and other needed assets. They obtain these funds by issuing bonds. The bond is a contract between the
issuer and the lender specifying the terms of repayment and the interest to be charged.

Owner's Equity

Capital. This account is used to record the original and additional investments of the owner of the business entity. It is
increased by the amount of profit earned during the year or I decreased by a loss. Cash or other assets that the owner
may withdraw from the business ultimately reduce it. This account title bears the name of the owner.
Note that ONLY sole proprietorships and partnerships use capital accounts. Corporations do not use Capital as an
account title. Instead, it uses Share capital and Retained earnings.

Withdrawals. When the owner of a business entity withdraws cash or other assets, such are recorded in the drawing of
withdrawal account rather than directly reducing the owner's equity account. Note that withdrawals are not applicable
to corporations.

Income Summary. It is a temporary account used at the end of the accounting period to close income and expenses.
This account shows the profit or loss for the period before closing to the capital account. This is not applicable to
corporations.

ACCOUNTS IN INCOME STATEMENT

Income
Revenue, or income, is the inflow of money or other assets (including claims to money, such as sale made on credit) that
results from sales of goods or services or from the use of money or property. The result of revenue is an increase in
assets.

Service Income. Revenues earned by performing services for a customer or client; for example, accounting services by a
CPA firm, laundry services by a laundry shop.

Sales. Revenues earned as a result of sale of merchandise; for example, sale of building materials by a construction
supplies firm.

Expenses. An expense involves the outflow of money, the use of other assets, or the incurring of a liability. Expenses
include the costs of any materials, labor, supplies and services used i an effort to produce revenue.

Cost of Sales. The cost incurred to purchase or to produce the products sold to customers during the period; also called
cost of goods sold.

Salaries or Wages Expense. Includes all payments as a result of an employer-employee relationship such as salaries or
wages, 13th month pay, cost of living allowances and other related benefits.

Telecommunications, Electricity, Fuel and Water Expenses. Expenses related to use of telecommunications facilities,
consumption of electricity, fuel and water. This is also known as Utilities Expense.

Supplies Expense. Expense of using supplies (e.g. office supplies) in the conduct of daily business.
Rent Expense. Expense for space, equipment or other asset rentals.

Insurance Expense. Portion of premiums paid on insurance coverage (e.g. on motor vehicle, health, life, fire, typhoon or
flood) which has expired.

Depreciation Expense. The portion of the cost of a tangible asset (e.g. Buildings and equipment) allocated or charged as
expense during an accounting period.

Uncollectible Accounts Expense. The amount of receivables estimated to be doubtful of collection and charged as
expense during an accounting period. This is also known as Doubtful accounts expense.

Interest Expense. An expense related to use of borrowed funds.

CHART OF ACCOUNTS (objective 4)

A listing of all the accounts and their account numbers in the ledger is known as the chart of accounts. The chart is
arranged in the financial statement order, that is, assets first, followed by liabilities, owner's equity, income and
expenses The accounts should be numbered in a flexible manner to permit indexing and cross-referencing.

When analyzing transactions, the accountant refers to the chart of accounts to identify the pertinent accounts to be
increased or decreased. If an appropriate account is not listed in the chart, an additional account may be added.
Presented below is an example of the chart of accounts:
a.

To help identify accounts in the ledger and make them easy to find, the accountant often numbers them. A list of these
numbers with the corresponding account titles is called chart of accounts.
Account number Account name Description
Assets
111 Cash Coins, currency, checks, money
112 Notes Receivable orders, money on deposit in a
113 Accounts Receivable bank
116 Office Supplies ( give a brief description for each
117 Prepaid Rent account name ; an example is
118 Prepaid Insurance given for Cash)
141 Land
142 Buildings
143 Accumulated Depreciation-Buildings
146 Office Equipment
147 Accumulated Depreciation-Office Equipment
Liabilities
211 Notes Payable
212 Accounts Payable
213 Unearned Service Revenue
214 Wages payable
Owner’s Equity
311 Owner’s Capital (or give the specific name of the
owner)/ Enriquez, Capital
312 Enriquez, Drawings
313 Income Summary
Income
411 Service Revenue
412 Interest Revenue
415 Miscellaneous Income
Expenses
511 Salaries Expense
512 Utilities Expense
513 Telephone/Communication Expense
514 Rent Expense
515 Insurance Expense
517 Office Supplies Expense
518 Depreciation Expense – Building
520 Depreciation Expense – Office Equipment

The first digit in the account number identifies the major financial statement classification – that is, an account number
that begins with the digit 1 means that the account is an asset account, an account number that begins with a 2 means
that account is a liability account, and so forth. The second and third digits identify individual accounts. The gaps in the
sequence of numbers allow the accountants to expand the number of accounts. Chart of accounts for a small business
normally normally have account numbers with three digits only. For large corporations, the number of digits in the
account number may reach five or even six.

EXERCISES
Part 1. Indicate how many items are classified under the ASSETS (including contra asset accounts), LIABILITIES,
OWNER’S EQUITY, INCOME and EXPENSES?

1 Withholding Tax Payable

2 Wage Payable
3 Unearned Service Revenue
4 Uncollectible Accounts Expense
5 Supplies Expense
6 Supplies
7 SSS Contribution Payable
8 Service Revenue
9 Salary Payable
10 Salary Expense
11 Rent Expense
12 Property Tax Expense
13 Prepaid Rent
14 Prepaid Insurance
15 PhilHealth Contribution Payable
16 Payroll Tax Expense
17 Pag-IBIG Contribution Payable
 18 Notes Receivable, Short-term
19 Notes Receivable, Long term
20 Notes Payable, Short- term
21 Notes Payable, Long term
22 Name of Owner, Drawings
23 Name of Owner, Capital
24 Miscellaneous Expense
25 Loss on Sale of Property, Plant & Equipment
26 Land
27 Interest Revenue
28 Interest Receivable
29 Interest Payable
30 Insurance Expense
31 Income Tax Payable
32 Gain on Sale of Property, Plant & Equipment
33 Furniture
34 Equipment
35 Employee Benefits Payable
36 Depreciation Expense-Furniture
37 Depreciation Expense-Equipment
38 Depreciation Expense-Building
39 Cash
40 Building
41 Allowance for Uncollectible Accounts
42 Accumulated Depreciation – Furniture
43 Accumulated Depreciation – Equipment
44 Accumulated Depreciation – Building
45 Accounts Payable
46 Accounts Receivable

Part 2. Classification of Accounts

The following ledger accounts are used by Andres Tutorials:

a. Cash m. Andres, Withdrawals

b. Salaries Expense n. Salaries Payable
c. Accounts Receivable o. Unearned Revenues
d. Andres, Capital p. Office Equipment
e. Service Revenues q. Rent Payable
f. Prepaid Rent r. Notes Receivable
g. Accounts Payable s. Interest Expense
h. Land T . Notes Payable
i. Supplies Expense u. Supplies
j. Prepaid Insurance v. Interest Receivable
k. Utilities Expense w. Rent Expense
l. Service Revenues

Required: Indicate each account’s classification and normal balance by placing check (✔) marks.

Type of Account
Normal Balance
Owner’s Equity
Assets Liabilities Andres, Andres,
Revenues Expenses Debit Credit
Capital Withdrawals
a. ✔ ✔
b.
c.
 d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
t.
u.
v.
w.

Part 3. Developing a Chart of Accounts

JC Alky organized a new business and named it Santos Business Consultancy. Listed below are the accounts that will be
needed in the ledger:

Consulting Revenues Santos, Withdrawals

Accounts Receivable Income Summary
Building Office Supplies Expense
Cash Santos, Capital
Rent Expense Notes Payable
Furniture and Fixtures Prepaid Rent
Land Interest Expense
Miscellaneous Expense Salaries Expense
Referral Revenues Unearned Consulting Revenues
Accumulated Deprecation – Building Office Supplies
Accumulated Deprecation – Furniture & Fixtures Interest Payable
Deprecation Expense – Building Insurance Expense
Deprecation Expense – Furniture & Fixtures Accounts Payable

Required:
Arrange these accounts in the order in which they would appear in the ledger. Assign each account a number, using
three-digit numbering scheme: the 100 series for assets, the 200 series for liabilities, etc. Use the second digit to indicate
specific accounts within a major category; for example, Cash would be account number 110.