Accounting Equation:

DEBIT CREDIT

- The destination of the economic benefits. - The source of economic benefits.

(economic benefits are: Cash, and other
forms of assets)

ASSETS = LIABILITIES + EQUITY

WHAT YOUR BUSINESS OWNS WHAT YOUR BUSINESS OWES

DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT

(INCREASE) (DECREASE) (DECREASE) (INCREASE) (DECREASE) (INCREASE)

THE BUSINESS IS DIFFERENT FROM ITS OWNER/S (THAT'S WHY THERE'S PERSONAL ASSETS
ETC.)!!

Account titles are identifications or brief descriptions of items that fall to the same kind, class or nature. In
recording business transactions, the elements of financial statements which are better known as “accounting
elements” or “accounting values” are to be assigned with their individual names called “accounting titles”.
These are the different account titles which we have classified into Balance Sheet and Income Statement
accounts.

BALANCE SHEET ACCOUNTS

(Permanent Accounts)

1. ASSETS
Assets are classified only 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, postal
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.
Petty Cash Fund - the account title for money placed and set aside for petty or small expenses.
Cash Equivalents - cash equivalent is defined as short-term, highly liquid instruments that are readily
convertible into cash.
Notes Receivable - this is a promissory note that is received by the business from the customer arising from
rendering of service, and sale of merchandise.
Accounts Receivable - account title for amounts collectible arising from services rendered to a customer or
client on credit. This constitutes an oral or verbal promise to pay by a customer or client.
Estimated Uncollectible Account - It provides for possible losses from uncollected 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.
Inventories - these are assets which are held for sale in the ordinary course of business, in the process of
production for such sale or in the form of materials or supplies to be consumed in the production process or in
the rendering of services.
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, and Prepaid Advertising.
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.
Non-Current Assets – “all other assets are not classified as current should be noncurrent assets".
Property and Equipment - these are "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 are expected to be used
during more than one period".
Land - an account title for the site where the building used as office, store or shop, are constructed.
Building - account title for a finished construction owned by the business where operations and transactions
took place.
Machinery and Equipment - includes welding machine, compressors, equipment and tools, which are termed
as "Shop equipment". Calculators, adding machines, computers, cash registers, steel filling cabinets are
termed as "office equipment" while trucks, jeeps, vans and other motor vehicles are called "transportation
equipment" or "delivery equipment" when used in delivering goods.
Furniture & Fixtures - include chairs, tables, counters, display and cases. If these are used in the office, the
account title is "Office Furniture and Fixtures", if these are used in shop, the account title is "Shop Furniture &
Fixtures" and if used in store, the account title is "Store Furniture & Fixtures”.
Prepaid insurance is payments made to insurers in advance for insurance coverage. Insurance companies
carry prepaid insurance as current assets on their balance sheets because it's not consumed.
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. The assets that are classified as
Property and Equipment are called Depreciable Assets and are subject to depreciation except land. Land is not
depreciated because it is expected to be useful to the business enterprise for an indefinite period of time.
Intangible Assets - these are identifiable non-monetary assets without physical substance. Examples are
patent, copyrights, franchise, goodwill, etc.

2. LIABILITIES
Current Liabilities - are financial obligations of the enterprise which are 1a) expected to be settled in the
normal course of the operating cycle; (b) due to be settled within one year from the balance sheet date.
Accounts Payable - an account title for a financial obligation of an enterprise that constitutes an oral or verbal
promise to pay. Always Short Term Obligation to the business. Can be converted to Notes Payable. Due to the
vendors or suppliers of the co. Originates from the purchase of inventories.
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. Can never be converted to accounts payable.
Due to the financial institution or credit company.
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, salaries, interest, taxes payable, etc.
Unearned Income - this is an account title for an income collected or 3 – received in advance and is not yet
considered as "earned".

Non-current Liabilities - are financial long-term obligations of the enterprise which are due and payable for
more than one year. This usually occurs in a corporate form of business organization.
Notes Payable (long - term) - same nature with that of Notes Payable (short-term) but only, this requires
payment for more than a year. Mortgage Payable – a financial obligation of the enterprise which requires a
fixed or tangible property to be pledged as a collateral to ensure payment. This is usually found in a corporate
business organization.
3. OWNER'S EQUITY
Capital - This is the center of the owner's concern because this may increase or decrease at any time as a
result of business operation. In the normal course of operation, Owner's Equity will be increased by "income"
and decreased by "expenses". The owner's capital investment is indicated by the use of the owner's name with
a word "capital" written after the name which is separated by a "comma". Thus, if the owner Marfen Tan, the
title for his capital account is, "Marfen Tan, 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 nam which is separated
by a "comma". Thus, if the owner is Marfen Tan who made withdrawal, the title for his drawing account is,
"Marfen Tan, Personal" or “Marfen Tan, Drawing" Income & Expense Summary - this is a temporary account
created at the end of the accounting period where Income and Expenses are temporarily closed to this
account.

INCOME STATEMENT ACCOUNTS

(Temporary Accounts)

4. INCOME OR REVENUE
Sales - refers to the account title for merchandise sold either in cash or account.
Sales Returns & Allowances - this is a reduction from sales account for goods that were sold but were
returned by the buyer or bad order or not conforming with the order. This is a reduction from the sales account.
Sales Discounts - refers to discounts given to buyers for early payment of merchandise purchased on account
or payment within the discount terms. This is a reduction from the sales account. 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:
Professional Income - the account title generally used by professionals for income earned from the practice
of their profession or maybe specified as; "Accounting and Auditing Fees Income" for Accountants, "Legal
Fees Income" for Lawyers, “Dental Fees Income" for Dentists, "Medical Fees Income" for Doctors, etc.
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.
Shop Income or Income from Repairs - income derived from repair of cars and other vehicles.
Interest Income - for income received by the business arising from an amount of money borrowed by a
customer and is usually covered by a promissory note. This is typical in a lending institution.
Miscellaneous Income - for income earned by the business which is not the main line of its activity and could
not be clearly classified.

COSTS AND EXPENSES COSTS

Cost of Sales or Cost of Goods Sold - refers to cost to produce and sell the merchandise.
COGS = AGFS - Ending Inv.
Available Goods for Sale = Beginning Inv.(Tira from the past accounting period) + Purchase

Freight-In - refers to transportation cost incurred in buying goods.

Purchases - the account title for "merchandise" purchased under the periodic inventory system. Under the
perpetual inventory system, the account title is "merchandise inventory". Purchase Returns and Allowances -
refers to cost of merchandise that were purchased but returned to the suppliers for bad order or does not
conform to the specification. This is a reduction from the purchase account.
Purchase Discounts - refers to discount availed for early payment of merchandise purchased. This is a
reduction from the purchase account.

5. EXPENSES
Freight-Out - refers to transportation cost of merchandise sold. Supplies Expense - this represents the cost of
supplies that were used and consumed that bears specific titles as office supplies expense, store supplies
expense and shop supplies expense.
Rent Expense - for the amount paid or incurred for use of property, usually premises.
Repairs and Maintenance - for expenses incurred in repairing or servicing the buildings, machineries,
vehicles and equipment which are owned by the business.
Salaries Expense - for compensation given to employees of a business. It may be specified as "Office
Salaries" or "Salesmen's Salaries”.
Uncollectible Accounts - for the anticipated loss that the business may incur arising from uncollectible
accounts.
Depreciation Expense - for the allocated portion of the cost of property and equipment or fixed assets.
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.
Insurance Expense - account title for the expired portion of the insurance premium paid.
Utilities Expense – the account title for telephone, light and water bills. Also included is gasoline, lubricants
and oil.
Miscellaneous Expense - any amount paid as expense which is not significant enough to warrant a particular
classification.

CHART OF ACCOUNTS

A chart of accounts is a listing of all the accounts and is usually tailored to the operations of the business. It
functions as a guide to the accountant or the bookkeeper in ensuring uniformity of and consistency in the use
of all accounts in recording business transactions. Most of the time, it is prepared in a manner such that the
five main or major accounts are grouped and organized. As such, at the earliest possible time, the business
should anticipate all specific accounts it may use in its lifetime that will be included in the list. Moreover,
business also just assign a range of numbers to major accounts to accommodate additional specific accounts
that may be created or might arise in the future.