Ave Maria College

SENIOR HIGH SCHOOL DEPARTMENT

School ID No. 402686 Gov’t Permit No. 0059 s. 2015
SS ABM G125- FUNDAMENTALS OF ACCOUNTANCY, BUSINESS and MANAGEMENT 2

LESSON 4: TYPES OF MAJOR ACCOUNTS

The five (5) types of major accounts are considered the elements that are directly related to measurement of financial
condition in the Statement of Financial Position are the Assets, Liabilities and Owner’s Equity, while the elements
directly related to measurement of performance in the Statement of Comprehensive Income are Income and Expense.
These accounting elements are given account name or account titles.

Account titles are identification or brief description of items that fall to the same kind, class or nature.

STATEMENT OF
FINANCIAL POSITION
OR
BALANCE SHEET
(Permanent Accounts)
A. ASSETS

These are defined as resources controlled by the enterprise as a result of past transactions and events and from
which future economic benefits are expected to flow to the enterprise. In layman's term, assets are defined as things of
value that are owned and used by the enterprise in' its operations. Examples are cash, building, land, machinery, furniture
& fixtures, equipment, tools, etc. It also includes inventories, prepaid expenses and a debt collectible by the enterprise
from a customer which we termed as a Receivable.

Per Philippine Accounting Standards (PAS No. 1), Assets are classified into two, namely: current assets and
non-current assets.

Current Assets refer to all assets that are expected to be realized, sold or consumed within the enterprise's normal
operating cycle. Operating cycle is the interval of time from the date of acquisition of merchandise inventory; sell the
inventory to customers and the ultimate collection of cash from the sale.

 Cash the account title to describe money, either in paper or in coins and money substitutes like check, post at
money orders, bank drafts and treasury warrants. When cash is within the premise of the business, the account
title is Cash on Hand and Cash in Bank if deposited in the bank.
 Cash Equivalents - PAS NO. 7, defines cash equivalents as 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 values because
of changes in interest rates.
 Petty Cash Fund-an account title for money that is separately placed inside the box and set aside for petty or
small expenses This usually happens when a company opens a bank account (savings or current) where it requires
a withdrawal slip or issuance of check every time it makes disbursements. It is time consuming and it is not wise
to make withdrawal slip or issue a check to pay a small amount of expenses of let's say P15.00 for jeepney fares.
This fund is handled by a petty cashier who is accountable for its disbursements he petty cashier is warned not to
mix his or her personal money with the petty cash fund.
 Notes Receivable - this is a promissory note that is received by the business from the customer arising from
rendering of services, sale of merchandise, etc. This can either be an interest bearing or non-interest bearing.
 Accounts Receivable the account title for amounts collectible arising from services rendered to a customer or
client on credit or sale of goods to customers on accounts. This constitutes an oral or verbal promise to pay by a
customer or client. For example, your friend borrows from you the sum of P350.00 to buy some bottles of beer
during drinking session. In accounting parlance, this means that you have an Accounts Receivable from him in the
amount of P350.00.
 Estimated Uncollectible Accounts this is an asset offset or a contra-asset account. It provides for possible losses
from uncollectible accounts. Although this is not actually an asset, it is classified as such because it is shown as a
deduction from the Accounts Receivable which is a Current Asset Account. For example, the company has an
amount collectible from various customers. Remember, not all customers are good payers. Thus, we provide a
certain percent (%) of what we could not collect from them. This is called estimated uncollectible accounts or
allowance for doubtful accounts which we previously termed as allowance for bad debts.
 Advances to Employees the account title for amounts collectible from employees for allowing them to make cash
advances which are deductible against their salaries or wages.
 Inventories Per PAS No. 4, these are assets which are (1) held for sale in the ordinary course of business; (2) in
the process of production for such sale; or (3) in the form of materials or supplies to be consumed in the
production process or in the rendering of services. These refers to grocery items such as sugar, canned goods,
dairy products, toiletries, etc. Vegetable items such as tomato, eggplant, garlic, ginger, etc.
  Supplies Inventory or Unused Supplies - an account title for cost of stationery and other supplies
purchased for use but are left on hand and still unused. The account title should be specified as to
Unused Office Supplies if intended for the office, Unused Shop Supplies if intended for the shop, etc.

 Prepaid Expenses - account title for expenses that are paid in advance but are not yet incurred or have not yet
expired such as Prepaid Rental, Prepaid Insurance, Prepaid Interest, Prepaid Advertising, etc.

These accounts are normally arranged according to liquidity (ready conversion to cash) in the Statement of Financial
Position.

Non-Current Assets:

 Property and Equipment- the International Accounting Standards No.16 defines property and equipment as
tangible assets which are held by an enterprise for use in production or supply of goods and services, for rental to
others, or for administrative purposes, and which are expected to be used during more than one period, such as:

o Land an account title for the site where the building used as office or store is constructed.
o Building account title for a finished construction owned by the business where operations and transactions
took place.
o Equipment - includes calculators, typewriters, adding machines, computers, steel filing cabinets and the like.
If these are used in the office, the account title is
o Office Equipment and if used in the store, Store Equipment. Trucks, jeeps, vans, automobiles and other
kinds of motor vehicles are used exclusively for delivering goods, the account title is Delivery Equipment.
o Furniture & Fixtures - include chairs, tables, counters, display cases and the like. If these are used in the
office, the account title is Office Furniture & Fixtures and if these are used in store, the account title is Store
Furniture & Fixtures.
o Accumulated Depreciation this is an asset offset or contra-asset account. This is called a Valuation Account
which is shown as a deduction from property and equipment. Each property and equipment should be
provided with their individual valuation account.

The assets that are classified as Property & Equipment or Fixed Assets are called Depreciable Assets and are subject to
Depreciation except "land". Land is not subject to depreciation because it is expected to be useful to the business
enterprise for an indefinite period of time.

B. LIABILITIES

These are defined as financial obligations of the business to its creditors. It represents the claim of the creditors over the
assets of the enterprise. Per PAS- NO.1, liabilities are classified only into two, namely: current liabilities and non-current
liabilities.

Current Liabilities - are financial obligations of the enterprise which are (a) expected to be settled in the normal course
of the operating cycle; (b) due to be settled within one year from the Statement of Financial Position date.
o Accounts Payable - an account title for a financial obligation of an enterprise that constitutes an oral or verbal
promise to pay. For example, you borrowed P50.00 from a friend to buy fresh fish for family consumption. In
accounting parlance, this means that you have an Accounts Payable to him in the amount of P50.00.
o Notes Payable (short-term) - same as Accounts Payable in nature but only the obligation is evidenced by a
promissory note. The enterprise is the one who issued the note.
o Accrued Expenses- these are expenses incurred by the enterprise but are not yet paid. This normally occurs when
the accounting period ended, such as rent payable, salaries payable, interest payable, taxes payable, etc.
o Unearned Income-this is an account title for an income collected or. Received in advance but services have not
been rendered yet.
Non-current Liabilities:
o Notes Payable (long-term) same nature with that of Notes Payable (short term) but only, this requires payment
for more than a year.
o Mortgage Payable - a financial obligation of the enterprise which requires a fixed or tangible property to be
pledged as a collateral to ensure payment.

C. OWNER'S EQUITY OR CAPITAL

This is the residual interest in the assets of the enterprise after deducting all its liabilities. This expressed in the equation as
Assets less Liabilities equals Owner's Equity or Capital. It is increased when there is Profit or additional contributions by
the owner and decreased when there is Loss or withdrawal by the owner. In. layman's language, Owner’s Equity or
Capital is the amount of money or value of property put by the proprietor into the business to start with the operation
which is referred to as Initial Investment or initial Capital. Capital is synonymous to Proprietorship, Proprietary Interest or
Net Worth.

The owner's capital be given a title by indicating the name, with the word capital written after the name which is separated
by a "comma". Thus, if the owners name Is Robert Jaworski, the title for his capital account is:

“Robert Jaworski, Capital”

Withdrawal- the owner’s withdrawal is likewise indicated by the use of the owner’s name with the word Drawing or
Personal written after the name which is separated by a comma. Thus, if the owner is Robert Jaworski who made
withdrawal, the title for his drawing account is:

“Robert Jaworski,
Personal” or “Robert
Income & Expense Summary Jaworski, Drawing”
this is a temporary account created at the end of the accounting period where Income and
Expenses are temporarily closed to this account.

STATEMENT OF
COMPREHENSIVE
INCOME
Or
Income Statement
D. INCOME OR REVENUE (Temporary Units)

These refers to the proceeds from services rendered by a servicing firm, income from use by other entities of the resources
of the enterprise like royalties income, rent income, interest income etc. It also includes proceeds from sale of
merchandise.

Service income - In general, this is the account title used for all types of income derived from rendering of services.
Sometimes the account title used is Service Revenue. Other specific income account titles used are:

o Professional Income the account title generally used by professionals for income earned from the practice of
their profession or may be specified as Accounting or Auditing Fees Income for Accountants, Legal Fees Income
for Lawyers, Dental Fees Income for Dentists, Medical Fees Income for Doctors, etc.
o Rental Income for income earned on buildings, space or other properties owned and rented out by the business as
the main line of its activity. Interest Income for income received by the business arising from an amount of money
borrowed by a customer and usually covered by a promissory note. This is typical in lending institutions.
o Miscellaneous Income for income earned by the business which is not the main line of its activity and could not
be clearly classified.

E. EXPENSES

These are the gross outflow of economic benefits during the period arising in the course of ordinary activities of an
enterprise when those outflow result in decrease in equity, other than those relating to distribution to owners.

o Supplies Expense- this represents cost of supplies that were used and consumed that bears specific titles as office
supplies expense, store supplies expense, shop supplies expense, etc.
o Rent Expense for the amount paid or incurred for use of property, usually premises.
o Repairs and Maintenance- for expenses incurred in repairing or servicing the buildings, machineries, vehicles,
equipment, etc., which are owned by the business.
o Salaries Expense for compensation given to employees of a business. It may be specified as Office Salaries,
Salesmen's Salaries, etc.
o Uncollectible Accounts for the anticipated loss that the business may incur arising from uncollectible accounts.
o Depreciation Expense for the portion of the cost of property and equipment or fixed assets that has expired based
on rational and systematic allocation procedure.
o Taxes and Licenses for the amount paid for business permits, licenses and other government dues except the
income Tax paid which is not allowable by law as a deduction.
o Insurance Expense account title for the expired portion of the insurance premium paid.
o Utilities Expense - the account title for telephone, light and water bills.
o Interest Expense - an expense incurred from borrowed money. This is separately shown as a deduction from
Profit before finance charges to arrive at Profit.
o Miscellaneous Expense any amount paid as expense which is not significant enough to warrant a particular
classification.
 o Gas & Oil- the account title for gasoline, diesoline, lubricants, grease, fluids, and lube oils, etc. for use by
company vehicles.

F. THE CHART OF ACCOUNTS

This is the list of account titles arranged from Assets, Liabilities, Owner’s Equity, Income and Expenses prepared
beforehand to guide bookkeeper and accountant of what specific titles are to be used in describing the exchange of values
in a transaction. This list of account titles is called “Chart of Accounts”

Shown below is an illustration of a chart of accounts under Service Concern-Servicing Operation.

(Business Name)
Chart of Accounts
Statement of Financial Position
Acct. No. Assets Acct. No. Owner’s Equity
Current Asset:
111 Cash in Bank 331 Owner’s, Capital
112 Accounts Receivable 332 Owner’s, Drawing
113 Estimated Uncollectible Accounts 333 Income & Expense Summary
114 Prepaid Insurance
115 Shop Supplies Inventory STATEMENT OF COMPREHENSIVE INCOME

Non-Current Asset: Revenue

Property Plant and Equipment 441 Service Income
116 Shop Equipment
117 Accumulated Depreciation Shop Expenses
Equipment
551 Insurance Expense
Liabilities 552 Rent Expense
221 Accounts Payable 553 Salaries Expense
222 Unearned Service Income 554 Shop Supplies Expense
223 Utilities Payable 555 Utilities Expense
224 Salaries Payable 556 Taxes and Licenses
225 Rent Payable 557 Depreciation Expense
558 Uncollectible Accounts Expense

The chart of accounts shows the account titles which are arranged in this order: ASSETS, LIABILITIES, OWNER’S
EQUITY, REVENUE and EXPENSES. If the transaction involves an account title which is not included in a given chart,
the bookkeeper may create an account title that he thinks more appropriate to use in describing the exchange in values.
Additional page of the ledger will also be provided.