Chapter 3. Type of Major Accounts

TYPE OF
MAJOR
ACCOUNTS
The Account
Account is the basic storage of information in
accounting. It is a record of the increases and decreases
in a specific item of asset, liability, equity , income or
expense.
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 – describe 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.
CASH This is the
“account title”
Debit Credit
The term “Credit’ (Cr ) simply refers to the
Jan. 1 500 right side of the account. It is sometimes
Jan 3 1,000 refered to as the “value parted with”
800 Jan.4
700
The difference between the total debits and
The term “debit” (Dr) simply credits in the account represents the
Refers to the left side of the balance of the account ( 500 + 1,000 – 800
account. = 700)
It is sometimes referred to as the
“value received”
Types of Major
Accounts
The Five Major Accounts
1. Assets are the resources owned and controlled by
the firm.
2. Liabilities are obligations of the firm arising from
past events which are to be settled in the future.
3. Equity or Owner’s Equity are the owner’s claims
in the business. It is the residual interest in the assets
of the enterprise after deducting all its liabilities.
4. Income is the increase in economic benefits during
the accounting period in the form of inflows of cash or
other assets or decreases of liabilities that result in
increase in equity. Income includes revenue and gains.
Revenue-arises in the course of the ordinary
activities of the business. e.g. sales, service income.
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.
5. Expenses are decreases in economic benefits during
the accounting period in the form of outflows of assets
or incidences of liabilities that result in decreases in
equity. Expenses both includes expenses and losses.
a. expenses- arise in the course of the ordinary
activities of the business.
b. losses – represents other items that meet the
definition of expenses and may or may not arise in the
course of ordinary activities of the business.
Classification of Five Major Accounts
According to Financial Statements
Statement of Income Statement
Financial Position Accounts
Accounts
1. ASSETS 4. INCOME
2. LIABILITIES 5. EXPENSES
3. EQUITY
Statement of Financial Position – (balance
sheet) is or components of a complete set of
financial statements that shows the financial
position of the business.
Income Statement- statement that shows the

profit and loss of the business.
Assets are the resources owned and controlled by the firm
• Current Assets are assets that can be realized (collected, sold, used up) one
year after year-end date. Examples include cash, accounts receivable,
merchandise inventory, prepaid expense, etc.
• Non-current Assets are assets that cannot be realized (collected, sold, used
up) one year after year-end date. Examples include Property, Plant and
Equipment, furniture, building, land, long term receivables, intangible assets,
long term investments, etc.)
• Tangible Assets are physical assets such as cash, supplies, and furniture and
fixtures.
• Intangible Assets are non-physical assets such as patents and trademarks
ACCOUNT TITLES used for ASSET ACCOUNTS
• Cash is money on hand, or in banks, and other items considered as
medium of exchange in business transactions
• Cash on hand refers to cash and other cash items which are not yet
deposited in the bank. It includes coins, currencies, check, money orders
and other money equivalents
• Cash in bank is money deposited in the bank
• Accounts receivable refers to claims of the business from anyone for
sales made or services rendered on account
• Notes Receivable – are claims of the business from anyone evidenced
by a note
• Inventories are assets held for resale
• Supplies are items purchased by an enterprise which are unused as of
the reporting date
• Prepaid Expenses are expenses paid in advance. They are assets at the
time of payment and become expenses through the passage of time.
Examples are supplies, prepaid insurance, prepaid rent
• Short term investments are the investments made by the
company that are intended to be sold immediately.
• Estimated Uncollectible Account is sometimes called
allowance for bad debts. It refers to a provision for accounts that
may not be collected in the future. This is a deduction from the
accounts receivable. The difference between the Accounts
Receivable and the estimated uncollectible account is called the
net realizable value
• Advance to officers and employees is a term that refers to
amounts given to officers and employees usually deductible from
their salaries
• Land refers to land space owned by the business

• Building refers to the building or edifice constructed, owned and
intended for use by the business
• Furniture and Fixtures is a term used to include tables and
chairs, cabinets, counters, and other pieces of furniture used in
the business. Sometimes specific terms like store furniture and
fixtures
• Delivery equipment – is a term that includes cars, jeeps, trucks,
vans, and other transportation vehicles owned by the business
• Accumulated Depreciation is a contra – asset account. It is a

deduction from a particular fixed asset account. All fixed assets
except land are subject to depreciation
• Long-term investments are the investments made by the
company for long term purposes
• Intangible Assets are assets without physical existence.
Examples include franchise and copyright
Liabilities are obligations of the firm arising from
past events which are to be settled in the future
• Current Liabilities
Liabilities that fall due (paid, recognized as revenue) within one year after
year-end date. Examples include Accounts Payable, Utilities Payable, Notes
Payable, Unearned Income, etc..
• Non-current Liabilities
Liabilities that do not fall due (paid, recognized as revenue) within one year
after year-end date. Examples include Notes Payable, Loans Payable,
Mortgage Payable, etc.
ACCOUNT TITLES used for LIABILITY ACCOUNTS
• Accounts Payable is a current liability which refers to debts or
obligations that arise from the purchases of goods or services on
account
• Notes Payable is a current liability if the note is payable within a
year. If the note is payable beyond one year, it is classified as a long-
term liability
• Interest Payable is the interest due to an interest bearing note.
Accrued interest expense is a term synonymous with interest payable
• Taxes payable are taxes due the government not yet paid by the
business
ACCOUNT TITLES used for LIABILITY ACCOUNTS
• Salaries Payable are salaries not yet paid by the business to its
employees or workers. Other examples of expenses not yet paid
by the business are rent payable, light and water payable.
• Long-term liabilities are obligations or debts of the business
that will be due and payable beyond one year
• Mortgage payable is a long-term liability account that refers to
debt secured by a mortgage on real estate
Equity or Owner’s Equity or Capital
are the owner’s claims in the business. It is the
residual interest in the assets of the enterprise
after deducting all its liabilities.
ACCOUNT TITLES used for OWNER’S EQUITY ACCOUNTS
• Capital is the value of cash and other assets invested in the

business by the owner of the business
• Drawing is an account debited for assets withdrawn by the
owner for personal use from the business
• Income and Expense Summary is a temporary account
opened at the end of the accounting period to absorb income
and expense accounts before finally closing it to capital. It
relieves the capital account of the many debits and credits
ACCOUNT TITLES used for OWNER’S EQUITY ACCOUNTS
• Capital is the value of cash and other assets invested in the

business by the owner of the business
• Drawing is an account debited for assets withdrawn by the
owner for personal use from the business
• Income and Expense Summary is a temporary account
opened at the end of the accounting period to absorb income
and expense accounts before finally closing it to capital. It
relieves the capital account of the many debits and credits
Income is the increase in economic
benefits during the accounting period in
the form of inflows of cash or other
assets or decreases of liabilities that
result in increase in equity. Income
includes revenue and gains. Income is a
general term to mean any earning made
by the business
ACCOUNT TITLES used for INCOME ACCOUNTS
• Service Income refers to earnings derived from services rendered whether
on cash or on account
• Fees is another general term used to designate income. Examples are legal
fees, medical fees, accounting fees, dental fees and other terms may be
used to denote income from a particular a particular type of professional
services
• Sales is a term to denote income derives from the sales of goods
• Commission income is an income account to designate earnings received
from selling anything on a commission basis
• Other income is another income account to designate earnings received
from sources other than its main source of income
Expenses are decreases in
economic benefits during the
accounting period in the form of
outflows of assets or incidences of
liabilities that result in decreases in
equity.
ACCOUNT TITLES used for EXPENSE ACCOUNTS
• Taxes and License are payments made by the business to the government
for its business operations like privilege taxes, percentage taxes, mayor’s
permit, etc.
• Salaries expense refers to the cost of services rendered by the employees
or workers of the business
• Supplies expense refers to the cost of office items like stationery, bond
paper, carbon paper,, ballpens, printers, etc.
• Delivery expense refers to the cost of transportation in delivering goods or
services to customer
• Bad debts expense refers to that portion of accounts receivable which may
not be collected
• Depreciation expense refers to that portion of the cost of the fixed asset
which has been charged to income during the period
• Insurance Expense refers to the insurance premium paid by the business
• Rent expense refers to the space occupied by the business or the payment for
the use of any property by the business
• Interest expense refers to the amount charged for the use of money
• Advertising expense is a term used to denote the cost of light and water
consumed by the business
• Repairs and maintenance are expenses for repairing or

servicing buildings, machineries, or equipment of the
business
• Salesman salaries are fixed wages given to salesmen
• Cost of sales or cost of goods sold is the purchase price or
the manufacturing cost of goods sold
• Communication expenses
CHART OF
ACCOUNTS
CHART OF ACCOUNTS
• A chart of accounts is a list of account titles used by the
bookkeeper as a guide in recording business transactions
• Asset, liability, owner’s equity, income, and expense
accounts are listed down to help the bookkeeper
• The chart of accounts help to identify where the money is
coming from and where it is going
• It is the foundation of the financial statements
Steps in the Preparation of a basic chart of
Accounts
• 1. Make two columns.
• 2. Prepare the assets, liabilities, equity, revenue, and expenses,
respectively.
• 3. List all assets, liabilities, equity, revenue, and expenses account in
the first column.
• 4. In the second column, choose an account code (this may vary
depending on the company).
• 5. In the third column, write the description of each account title.
Example of a Chart of Accounts
Identifying the accounts:
1. You are renting the space for your laundry

business.The contract required you to pay
10,000.00 rent in advance.
The rent paid in advance is prepaid rent and will be
charged as rent expense when incurred.
2. Your friend borrowed 1,000 from your business
and you required him to sign a promissory note to
repay you within 30 days at 2 % monthly.
3. A customer buy a product of your business and

told you that he will pay you after a month worth
500.00 with interest of 1%
4. The customer with the P500 account receivable
is broke. You have estimated that you can only
collect P420.00 from him .
4. You purchased pork worth P1000.00 to be
marinated and sold as barbeque.
5. You purchases table napkins worth P 200.00 to
be used in your barbeque operation.
_____1. It is the obligations of the company
payable in money, goods or services.
___ 2. These are non-current tangible assets.
_____3. These assets are identifiable, non-monetary
assets without physical substance.
_____4. It is the claim of the owner also known as
the capital.
_____5. It is the most liquid asset and is the
medium of exchange for business transactions.
__ 6. It is an expense for leased office space,
equipment or assets rented from others.
_____7. Examples of this are cash, account
receivable and prepaid expenses.
_____8. It is a written promise from the customer
to pay his receivables on a certain future date.
Indicate whether it is an increase (+), decrease (-), or no
effect on the asset, liabilities and equity accounts.
• Investment of cash in the business
• Purchase of computer equipment for cash
• Billed a customer for services rendered
• Paid salaries
• Purchased office supplies on credit
• Paid advertising expense
• Paid rent in advance for 3 months
• Withdrew cash for personal use
• Received cash from customers on account
• Withdrew cash for personal use
• Invested land into the company

Chapter 3. Type of Major Accounts

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Chapter 3. Type of Major Accounts

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TYPE OF

Income Statement- statement that shows the

• Land refers to land space owned by the business

• Accumulated Depreciation is a contra – asset account. It is a

• Capital is the value of cash and other assets invested in the

• Capital is the value of cash and other assets invested in the

• Repairs and maintenance are expenses for repairing or

1. You are renting the space for your laundry

3. A customer buy a product of your business and

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