UNIT 4

Types of Major Accounts

Introduction

Accounting services generally include working with recorded financial data. The process or act
of recording daily transactions of a business is known as bookkeeping. Transactions may include
sales, expenses, cash and bank transactions, which are recorded in a ledger or journal. At the end
of this chapter, you will soon realize that the accuracy of the information recorded in the ledger
is pivotal to the finances of any entity.
Before in-depth discussion in accounting could proceed, one must first have a good foundation
on its basic concepts. Knowing how to correctly classify transactions would provide a reliable
data to all its financial users, and would aid in drawing dependable decisions. Managers for
example, would be assisted in handling the entity effectively and how to deal with customers
efficiently. This would further aid in overseeing the financial status of the entity itself, check
whether the entity complies with its tax obligations and hundreds more. This chapter will orient
you in identifying the five major accounts in accounting, and would further aid in the process of
recording financial transactions in the books of account.

Unit Learning Outcomes:

1. To identify and explain the five major accounts.

2. Give examples of each major type of account.
3. Apply such in recording financial transactions of an entity.

Topic 1: The Five Major Accounts

Time Allotment: 1 hour

Activating Prior Learning

Matching Type.
Assets Accounts Receivable Intangible Assets
Liabilities Notes Receivable Property, Plant and Equipment
Owner’s Equity Rent Expense Cash
Prepaid Expense

____________ 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.
How much score did you get?
Try to assess your performance based on the given scores and their descriptive value.
8 - Excellent
7-6 - Good
5-4 - Fair
0-3 - Poor

Congratulations! You did a great job.

Presentation of Content
TOPIC 1. Types of major accounts
The five major accounts, also called the elements of financial statements, are actually the
items in the expanded accounting equation previously discussed.
 Assets are the resources owned and controlled by the firm.
 Liabilities are obligations of the firm arising from past events which are to be settled
in the future.
 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.
 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.
 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.

Assets
May be classified as Current, Non-Current Assets, Tangible and Intangible Assets.
• 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 (equipment, furniture,
building, land), 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

Current Assets
• Cash is money on hand, or in banks, and other items considered as medium of exchange in
business transactions.
• Accounts Receivable are amounts due from customers arising from credit sales or credit
services.
• Notes Receivable are amounts due from clients supported by promissory notes.
• Allowance for bad debts are the aggregate amount of estimated losses from uncollectible
accounts receivable.
• 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.
• Accrued Income is revenue earned but not yet collected
• Short term investments are the investments made by the company that are intended to be
sold immediately

Non-Current Assets
• Land the lot; vacant or occupied by a building owned by the entity. This is not depreciable.
• Building is a long-lived asset which have been acquired for use in operations.
• Accumulated Depreciation is the total amount of depreciation expense recognized since a
depreciable asset was acquired. This is a contra-asset account.
• Equipment consists of various assets such as machineries, office equipment, computer
equipment and furniture and fixtures
• Long term Investments are the investments made by the company for long-term purposes
• Intangible Assets are assets without a physical substance. Examples include franchise and
copyright.

Liabilities
Liabilities are the debts and obligations of the company to another entity.
Differences of Current vs. Non-Current Liabilities.
 Current Liabilities. Liabilities that fall due (paid, recognized as revenue) within one
year after year-end date. Examples include Accounts Payable, Utilities Payable and
Unearned Income.
 Non-current Assets are 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

Current Liabilities
Accounts Payable are amounts due, or payable to, suppliers for goods purchased on account or
for services received on account.
Notes Payable are amounts due to third parties supported by promissory notes.
Accrued Expenses are expenses that are incurred but not yet paid (examples: salaries payable,
taxes payable)
Unearned Income is cash collected in advance; the liability is the services to be performed
or goods to be delivered in the future.

Non-Current Liabilities
Loans Payable
Mortgage Payable

Owner’s Equity
Owner’s Equity is the residual interest of the owner from the business. It can be derived by
deducting liabilities from assets.

Account Titles used for Equity Account.

Capital is the value of cash and other assets invested in the business by the owner of the
business.
Owner’s Drawings is an account debited for the temporary withdrawals of the owner during the
period.

Income
Income is the increase in resources resulting from performance of service or selling of goods.
examples of Income Accounts: Service revenue for service entities, Sales for merchandising and
manufacturing companies, Interest Income and Gains

Expense
Expense is the decrease in resources resulting from the operations of business
Examples of Expense Accounts: Cost of sales/ Cost of goods sold, Freight out, Salaries
Expense, Interest Expense, Utilities Expense, Bad dept expense, Depreciation expense, etc.

Topic 2: Chart of accounts

Time Allotment: 30 minutes

Learning Objectives:
At the end of this topic, you will be able to:
a. Determine what is a chart of account and its importance
b. Know how to prepare a chart of account
Chart of Accounts
• A chart of accounts is a listing of the accounts used by companies in their financial records.
• The chart of accounts helps to identify where the money is coming from and where it is
going.
• The chart of accounts is the foundation of the financial statements.

Setting up a Chart of Accounts:

The following are the steps in the preparation of a basic chart of accounts:
 1. Create two columns.
2. Prepare the assets first, then liabilities, then equity, then revenue and expenses.
3. List all assets, liabilities, equity, revenue and expenses account in the first column.
4. On the second column, choose an account code/ account number (discretion of the
company).
5. On the third column, write the description for each account on when to use it.

An example of a chart of accounts

Account Account Title Explanation of Account
Number
100 Cash on Hand To record cash collected from sale or collection of receivables
and other sources of cash presently in the hands of the
business under the custodianship of the cashier
101 Cash in Bank To record the amount of money deposited under the savings
and current account which is used without restriction to the
business. This amount of cash is made available for current
operation.
102 Petty Cash Fund The business normally uses petty cash account to take care of
the small expenses. Issuing a check is impractical for small
expenses. A custodian of the petty cash fund is appointed
separate from the general fund cashier.
103 Notes Receivable These are claims of the owner from its customers or other
stakeholders evidenced by promissory notes under the control
of the business. It may be interest or non-interest
104 Accounts These are claims from the customers not evidenced by a
Receivable promissory note usually from sale on account or making
advance payments to clients. Also called open-account
receivable.
105 Prepaid Rent The account prepaid rent is used to record advance payment
and security deposit paid in advance to occupy the rented
premises. An asset account until the expired portion is
changed to expense.
106 Prepaid Insurance The account prepaid insurance applies to the insurance
premium paid in advance for more than a year. An asset
account until applied to the expenses portion.
107 Office Supplies This account is used to record the purchase of office supplies
such as worksheet, computer ink and paper, pencil, ball pen,
coupon bond, and other supplies used in the office.
108 Other Asset Property which are not grouped under the standard accounts
because the account deems it impractical to do so.
201 Accounts Payable An account used to record the liability from acquiring
materials, goods and suppplies from the creditor on account
202 Notes Payable An account used to record issuance of promissory note with a
term less than a year
203 Loans Payable An account used to record the liability from receiving a loan
from a bank and other financial institutions
204 Mortgage An account used to record a liability from obtaining large
Payable amounts of loan using some collateral properties
205 Salary Payable An account used to record unpaid salary
206 Interest Payable An account used to record accrued interest from loan and
mortgage payables
207 Long-Term Notes An account used to record issuance of promissory notes with
Payable a term of more than a year
301 Service Income An account used to record revenue received from client from
rendering of services
 302 Gain on Sale An account used to record the gain on sale of old asset
303 Interest Income Account used to record the interest earned from penalty
imposed on delayed customers and from receipt of payment
of interest-bearing promissory notes
304 Miscellaneous An account used to record revenue from selling other assets
Income like retaso, old newspapers, and the like
401 Salary Expense To record payment of salary to office employee, factory
worker, and ordinary worker. It includes payment of 13th
month pay, sick leave, and vacatio leave
402 Rent Expense To record payament of rent on leased premises whether store
or space, or warehouse. It includes vehicle and equipment
rental.
403 Light and Power An account used to record electricity cost for the month
Expense
404 Water Expense An account used to pay water consumption for the month
Telephone and An account used to record cost of communications for the
405 Communication month.
Expense
406 Advertising Account used to record the cost of advertisement, pamphlet,
Expense tarpaulin, radio time, and airtime.
407 Office Supplies An account to record the cost of supplies used in the office
Expense such as computer ink and paper, pencil, pen, photocopying
expense and other office supplies.
408 Insurance An account to record the cost of insurance premiums paid to
Expense insurance company for the safety and insurance of company-
owned asset and property.
409 Repair and An account used to record the cost of maintaining equipment
Maintenance and vehicle of the company. It is used to record the repair of
Expense equipment, vehicles and furniture.
410 Taxes and An account to record the cost of mayor’s permit and
Licenses Expense registration fees to government agencies.
411 Membership Fees An account used to record membership fees paid to accredited
Expense institution.
412 Contribution and An account used to record contribution and donation made by
Donation the company such as religious and charitable donations.
Expense
413 Gas Oil Expense An account used to record gasoline and oil expense used by
the company.
414 Freight out An account used to record freight or transportation fares
incurred in rendering of service, and other fare expenses.

Topic 3: The T-Account

Time Allotment: 30 minutes

Learning Objectives:
At the end of this topic, you will be able to:
a. Determine what is a T-Account and its importance
b. Know how to prepare a T-Account
c. Know the basic rules on debit and credit
The T-Account
The simplest form of a ledger is called the T-Account. It has two sides to record the
increase and decreases of an account. The left side is for recording of increases in ASSET and
EXPENSE account, while the right is used to record the increase of LIABILITY, INCOME, and
CAPITAL. At the center of the T-Account is the title of the account. To illustrate:
Cash

Left side or Right side or

Debit side Credit side

Cash is the account title of the ledger.

The left side is the debit side and the right side is the credit side.

When an amount is recorded on the left side it simply means debiting the account and
when it is to be recorded on the right side, it is crediting the account.

Some accounts are increased on the debit side while some accounts are increased on the credit
side depending on its position in the accounting equation:

Asset = Liabilities + Owner’s Equity

Since asset and expense account has two sides – the left and the right – asset and expense
increase on debit side and decrease are on the credit side. The accounts liability, income and
owner’s equity are increased on the right side and decrease on the left side. Thus, the table below
explained the rules of debit and credit:

ASSET/ Expense LIABILITIES/ Income OWNER’S EQUITY

Left side Right Side Left side Right Side Left side Right Side
Debit- Credit- Debit- Credit- Debit- Credit-
increase decrease decrease increase decrease increase

Rule of Debit and Credit

To summarize, the following rule for debit and credit should be observed in processing,
recording and posting business transaction:

1. An increase in asset and expense is to be recorded on the debit side, while a

decrease will be recorded on the credit side.
2. An increase in liability and income is to be recorded in the credit side, while the
decrease will be recorded on the debit side of the account.
3. An increase in owner’s equity is to be recorded on the credit side, while a
decrease will be recorded on the debit side of the account

Take note that every transaction must have a debit amount with a corresponding credit
amount, no matter how many accounts are affected. This process is called the Double Entry
Bookkeeping System.
Let us take a look at the T-account – a kind of ledger that summarizes the increase and
decrease of an account. Transactions are posted for each particular account at any point in time;
the balance of each could be determined and computed. The difference between the debit total
and the credit total is called the account balance. If the debit total is higher than the credit total,
the account balance is called debit balance. If the total credits are higher than the debit total, the
account balance is called credit balance. Normally the assets, owner’s drawing , and the expense
accounts have a debit balance, while the liabilities, revenues and the owner’s capital have a
credit balance.

Application
Congratulations! You have just completed Topic 4.
I prepared some activities for you to assess your learning. Please answer/accomplish
the following activity/ies

I. Classify the following items into current asset and non-current asset, tangible and
intangible.

II. Indicate the classifications of the accounts listed below as either as ASSET,
LIABILITY, EQUITY, INCOME OR EXPENSE account under COLUMN A
and as either a BALANCE SHEET account or an INCOME STATEMENT account in
COLUMN B.
Account Titles Column A Column B
1. Accounts Receivable
2. Bad debt expense
3. Building
4. Notes Payable
5. Rent expense
6. Owner’s equity
7. Interest income
8. Cash
9. Gain
10. Computer equipment
11. Depreciation
12. Utilities expense
13. Freight-out
14. Rent income
15. Unearned income

III. Identify if the account is an asset, liability, equity, income or expense in column A
and indicate its normal balance, (whether on a debit or credit side) in column B
 Unit Summary
 An account is a record of the increases and decreases in a specific item of asset, liability,
equity, income or expense. It has 3 parts; account name, debit side, credit side.
 Debit is the left while credit is the right side
 The balance of an account is the difference between the total debits and total credits in
that account
 The Five major accounts are:
1. Asset, which may be classified as current, non-current, tangible or intangible
2. Liability, which may be classified as current or non-current
3. Equity
4. Income
5. Expenses
 Assets, liabilities and equity are balance sheet accounts, while income and expenses are
income statement accounts
 A chart of accounts is a list of all the accounts used by the business
 Account numbers are assigned to each account to facilitate recording, cross referencing
and retrieval of information.
 The simplest form of a ledger is called the T-Account
 Basic rule on debit credit

ASSET/ Expense LIABILITIES/ Income OWNER’S EQUITY

Left side Right Side Left side Right Side Left side Right Side
Debit- Credit- Debit- Credit- Debit- Credit-
increase decrease decrease increase decrease increase