Learning Objectives

After reading this handout the student will be able to:

1. State the Five Major Accounts
2. Give examples of each type of accounts.
3. Define the normal and abnormal balance of accounts
4. Define the balance sheet and income statement accounts
5. Define contra and adjunct account

The Account

Account - is the basic storage of information in accounting. It is a record of the

increases and decreases of a specific item of asset, liability, equity, income or expense.
Account may be depicted through a “T-account”. A “T-account” is called as
such because it resembles the letter “T”.
Three parts of “T-account”
• Account title – describes the specific item of asset, liability, equity, income or
expense.
• Debit side - left side of the account.
• Credit side – right side of the account.

This is the "account title"

CASH
Debit Credit
03-Jan 500
08-Feb 1,000 The term "credit" (Cr.) simply
refers to the right side of the
04-Apr 800
account. It is sometimes referred
to as the "value parted with"

Balance 700

The difference between the total debits

The term "debit" (Dr.) simply refers and credits in the account represents the
to the left side of the account. It is balance of the account (500 + 1000 - 800 =
sometimes referred to as the "value 700).
received"
If total debits exceed total credits, the
account has a debit balance. If total credits
exceed total debits, the account has a
credit balance

Reference: Financial Accounting and Reporting (fundamentals) by Zeus Vernon B. Millan

The Five Major Accounts – also called the elements of the financial statements, are
actually the items in the expanded accounting equation.

1. Assets – are the resources that entity control which have resulted from past
events and can provide the entity with future economic benefits.
2. Liabilities – are the entity present obligations that have resulted from past
events and can require the entity to give up resources when settling them.
3. Equity - assets minus liabilities or owner’s capital.
4. Income – are increases in economic benefits during the period in the form of
inflows or enhancements of assets or decreases of liabilities that result in
increases in equity, other than those relating to investments by the business
owners.
Income include both revenue and gains.
a. Revenue arises in the course of the ordinary activities of a
business.
b. 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 period in the form of
outflows or depletions of assets or increases of liabilities that result in decrease
in equity, other than those relating to distributions to the business owners.
Expenses include both expenses and losses.
a. Expenses arise in the course of the ordinary activities of a
business.
b. Losses represent other items that meet the definition of expenses
and may or may not, arise in the ordinary course of the ordinary
activities of an entity.
c.
Classification of the Five Major Accounts

➢ Balance Sheet (or the Statement of Financial Position) is one of the

components of a complete set of financial statements. The balance sheet shows
the financial position of a business
Balance sheet account includes assets, liabilities and equity.

➢ Income Statement (or the Statement of Profit and Loss) is a subcomponent

of the Statement of Comprehensive Income, which is also one of the components
of a complete set of financial statements. The income statement shows the profit
and loss of business.
Income Statement account includes income and expenses.

Reference: Financial Accounting and Reporting (fundamentals) by Zeus Vernon B. Millan

The Chart of Accounts

A chart of accounts is a list of all the accounts used by a business.

Ex.
CHART OF ACCOUNTS
Balance Sheet Accounts Income Statement Accounts
Account Account
ASSETS INCOME
No. No.
110 Cash 410 Service Fees
120 Accounts Receivable 420 Sales
125 Allowance for Bad Debts 430 Interest Income
130 Notes Receivable 440 Gains
140 Inventory
EXPENSES
150 Prepaid Supplies
155 Prepaid Rent 510 Cost of Sales
160 Prepaid Insurance 515 Freight-Out
170 Land 520 Salaries Expense
180 Building 525 Rent Expense
Accumulated Depreciation -
185 Bldg. 530 Utilities Expense
190 Equipment 535 Supplies Expense
195 Accumulated Depreciation - 540 Bad Debt Expense
Equipment 545 Depreciation Expense
550 Advertising Expense
LIABILITIES
555 Insurance Expense
210 Accounts Payable 560 Taxes and Licenses
Transportation and Travel
220 Notes Payable 565 Expense
230 Interest Payable 570 Interest Expense
240 Salaries Payable 575 Miscellaneous Expense
250 Utilities Payable 580 Losses
260 Unearned Income
EQUITY
310 Owner's Capital
320 Owner's Drawing

Account numbers are assigned to the accounts to facilitate recording, cross-

referencing, and retrieval of information. Although there is no standard way of assigning
account numbers, account numbers should be assigned in a manner that the accounts
are categorized logically.

The account titles in the chart of accounts shown above are numbered in the
following manner:

1. The first digit in the 3-digit numbering refers to the major types of accounts.
Ex. 1 10 Cash

Reference: Financial Accounting and Reporting (fundamentals) by Zeus Vernon B. Millan

 2. The second digit in the 3-digit numbering refers to the account titles and the
sequence on how they are listed in the chart of accounts
Ex. 1 1 0 Cash
1 2 0 Receivable

3. The third digit in the 3-digit numbering, if not zero, signifies that the account is a
contra account or an adjunct account to a related account.
Ex. 1 8 0 Building
1 8 5 Accumulated Depreciation – Bldg.

Common Account Titles

Balance Sheet Accounts

❖ ASSET

• Cash – Includes money or its equivalent that is readily available for unrestricted
used. e.g., Cash on hand and Cash in bank.
• Accounts Receivable – receivables supported by oral or informal promise to pay.
• Allowance for Bad Debts – the aggregate of estimated losses from uncollectible
accounts receivable. Another term is “allowance for doubtful accounts”.
• Notes Receivable - receivables supported by written or formal promises to pay in
the form of promissory notes.
• Inventory – represents goods that are held for sale by a business.
• Prepaid Supplies – represents the cost of unused office and other supplies
• Prepaid Rent – rent paid in advance.
• Prepaid Insurance – cost of insurance paid in advance.
• Land – the lot on which the building of the business has been constructed or a
vacant lot which is to be used as future plant site. Land is not depreciable.
• Building - the structure owned by a business for use in its operations.
• Accumulated depreciation – building the total amount of depreciation expenses
recognized since the building was acquired and made available for use.

• Equipment – consists of various assets such as:

a. Machineries and other factory equipment
b. Transportation equipment, e.g., vehicles, delivery truck
c. Office equipment, e.g., desks, cabinets, chairs
d. Computer equipment, e.g., server, personal computers, laptops
e. Furniture and Fixtures e.g., desks, cabinets, movable partitions

• Accumulated depreciation – equipment – the total amount of depreciation

expenses recognized since the equipment was acquired and made available for
use.

Reference: Financial Accounting and Reporting (fundamentals) by Zeus Vernon B. Millan

 ❖ LIABILITIES

• Accounts Payable – obligations supported by oral or informal promises to pay by

the debtor.
• Notes Payable – obligations supported by written or formal promises to pay by the
debtor in the form of promissory notes
• Interest Payable - interest incurred but not yet paid which arises from interest-
bearing liabilities.
• Salaries Payable – salaries already earned by employees but not yet paid by the
business.
• Utilities Payable - utilities already used but not yet paid.
• Unearned Income – items related to income that were collected in advance before
they earned.

❖ EQUITY (Capital, Net Assets or Net Worth)

• Owner’s capital (or Owner’s Equity) – the residual amount after deducting
liabilities from assets.
• Owner’s drawings – this account used to record the temporary withdrawals of the
owner during the period, any balance of this account is closed to the Owner’s
capital account.

INCOME STATEMENT ACCOUNTS

❖ INCOME

• Service fees – revenues earned from rendering services

• Sales – revenues earned from the sale of goods
• Interest Income – revenues earned from the issuance of interest-bearing notes
• Gains - income earned from the sale of assets or from enhancements of assets or
decreases of liabilities that are not classified as revenue.

❖ EXPENSES

• Cost of sales (or Cost of goods sold) - represents the value of inventories that
have been sold during the accounting period.
• Freight-out – represents the sellers’ costs of delivering goods to customer. Other
terms for freight-out are “delivery expense”, “transportation-out,” and “carriage
outwards”
• Salaries expense – represents the salaries earned by employees for the services
they have rendered during the accounting period.
• Rent expense – represents the rentals that have been used up during the
accounting period.

Reference: Financial Accounting and Reporting (fundamentals) by Zeus Vernon B. Millan

 • Utilities expense – represents the cost of utilities that have been used during the
accounting period.
• Supplies expense – represents the cost of supplies that have been used during
the period.
• Bad debt expense – the amount of estimated losses from uncollectible accounts
receivable during the period. Other term is “doubtful account expense”
• Depreciation expense – the cost of depreciable asset that has been allocated to
the current accounting period.
• Advertising expense – represents the cost of promotional or marketing activities
during the period.
• Insurance expense – represents the cost of insurance pertaining to the current
accounting period.
• Taxes and Licenses – represent the cost of business and local taxes required by
the government for the conduct of business.
• Transportation and Travel Expense
o Transportation Expense – represent the necessary and ordinary cost of
employees getting from one workplace to another which are reimbursable
by the business.
o Travel Expense – represent cost incurred when travelling away from home
on business trips.
• Interest Expense – represents the cost of borrowing money. It is the price that a
lender charges a borrower for the use of the lender’s money.
• Miscellaneous Expense – represents various small expenditures which do not
warrant separate presentation.
• Losses – expenses which may or may not arise from the ordinary course of
business activities.

BOOKS OF ACCOUNTS AND DOUBLE-ENTRY SYSTEM

Journal – also called the “book of original entry”, is the accounting record where
business transactions are first recorded. Business transactions are recorded in the journal
through journal entries. The recording process is called journalizing.

Types of Journal

1. Special Journal – is used to record transactions of a similar nature. Special

journals simplify the recording process, thus providing an efficient way of
recording retrieving of information.

Common examples of Special Journals

❖ Sales journal – is used to record sales on account.
❖ Purchase journal – is used to record purchase of inventory on account
❖ Cash receipts journal – is used to record all transactions involving receipts
of cash.

Reference: Financial Accounting and Reporting (fundamentals) by Zeus Vernon B. Millan

 ❖ Cash disbursement journal – is used to record all transactions involving
payment of cash.

2. General Journal – all other transactions that cannot be recorded in the special
are recorded in the general journal.

Ledger – is a systematic compilation of a group of accounts. It is used to classify the

effects of business transactions on the accounts. The ledger is also called the “book of
secondary entries” or the “book of final entries” because it is used only after
business transactions are first recorded in the journals. The process of recording in the
ledger is called posting.

Kinds of Ledgers

1. General ledger – contains all the accounts appearing in the trial balance.
2. Subsidiary ledger – provides a breakdown of the balances of controlling
account.
✓ Controlling account (control accounts) is one which consists of a group of
accounts with similar nature. The balance of control accounts is shown in the
general ledger while the balances of the accounts that compromise the
controlling account are shown in subsidiary ledger. Not all accounts in the
general ledger though are controlling accounts. Only those whose balances
necessarily need a breakdown are considered controlling accounts.

Sample Presentation of General Journal

GENERAL JOURNAL

DATE ACCOUNT TITLES ACCT. #S. DEBIT CREDIT

01/20/21 CASH 110 1,000 50
ACCOUNTS PAYABLE 210 1000 50
to record cash received
on account

centavos are
placed here

Reference: Financial Accounting and Reporting (fundamentals) by Zeus Vernon B. Millan

 SAMPLE PRESENTATION FOR GENERAL AND SUBSIDIARY LEDGER

GENERAL LEDGER SUBSIDIARY LEDGER

CUSTOMER BITOY
DATE Ref. Debit Credit Balance
BALANCE Forwarded ₱ 2,500.00
FEB 14, 2020 ₱ 10,000.00 ₱ 12,500.00

CUSTOMER ITOY
DATE Ref. Debit Credit Balance
ACCOUNTS RECEIVABLE No.120 BALANCE Forwarded ₱ 1,500.00
DATE Ref. Debit Credit Balance FEB 14, 2020 ₱ 20,000.00 ₱ 21,500.00
BALANCE Forwarded ₱ 80,000.00
FEB 14, 2020 ₱ 30,000.00 ₱ 110,000.00 CUSTOMER BEBANG
FEB 15, 2020 ₱ 4,000.00 ₱ 106,000.00 DATE Ref. Debit Credit Balance
BALANCE Forwarded ₱ 8,000.00
FEB 15, 2020 ₱ 4,000.00 ₱ 4,000.00

Reference: Financial Accounting and Reporting (fundamentals) by Zeus Vernon B. Millan

The Double Entry System

All transactions are recorded in the accounting records using the “double entry
system”. Under this system each transaction is recorded in two parts – debit and
credit

Concepts of Duality and Equilibrium

A. Concept of Duality – views each transaction as having a two-fold effect on

values – a value received and a value parted with, and each transaction is
recorded using at least two accounts.
B. Concept of Equilibrium - requires that each transaction is recorded in terms of
equal debits and credits. For every amount debited there is a corresponding
amount credited or vice versa.

Normal Balance of Accounts

The normal balance of account is on the side where an increase in that account
is recorded.
DEBIT CREDIT
Asset Liabilities
Expenses Equity
Income
Type of Normal
Account Balance DEBIT CREDIT
ASSET DEBIT INCREASES DECREASES
EXPENSES DEBIT INCREASES DECREASES
LIABILITY CREDIT DECREASES INCREASES
EQUITY CREDIT DECREASES INCREASES
INCOME CREDIT DECREASES INCREASES
Ending balance of an account

The difference between the monetary totals of debits and credits to an account
represents the ending balance of that account. The minimum ending balance of account
is zero. This occur when the total debits equal to the total credits to the account.
If an asset or expense account results to an ending balance that is credit, meaning
the total amount debited is less than the total amount credited, then the account is said
to have an “abnormal balance”. If the liability, equity and income account results to an
ending balance that is debit meaning that the total credited amount is less than the total
debited amount then the account is said to have an “abnormal balance”. This means a
recording error has been committed and a correction is needed to eliminate the abnormal
balance.

Reference: Financial Accounting and Reporting (fundamentals) by Zeus Vernon B. Millan

 ASSET OR EXPENSE ACCOUNT LIABILITIES, EQUITY AND INCOME ACCOUNT
DEBIT CREDIT DEBIT CREDIT
100 80 200 400
Ending Bal. 20 Ending Bal. 200
NORMAL NORMAL

ASSET OR EXPENSE ACCOUNT LIABILITIES, EQUITY AND INCOME ACCOUNT

DEBIT CREDIT DEBIT CREDIT
100 100 100 100
Ending Bal. 0 Ending Bal. 0
NORMAL NORMAL

ASSET OR EXPENSE ACCOUNT LIABILITIES, EQUITY AND INCOME ACCOUNT

DEBIT CREDIT DEBIT CREDIT
100 200 800 400
Ending Bal. 100 Ending Bal. 400
ABNORMAL ABNORMAL

Reference: Financial Accounting and Reporting (fundamentals) by Zeus Vernon B. Millan

Contra and Adjunct Accounts

Some accounts have related accounts to them. An account related to another

account is referred to as either a contra account or on adjunct account.

❖ Contra accounts are presented in the financial statements as deduction to their

related accounts.
❖ Adjunct accounts are presented in the financial statements as addition to their
related accounts.

Thus:
o If an account has a normal debit balance, its contra account has a normal
credit balance (the opposite). To credit a normal debit balance means to deduct.
o If an account has a normal debit balance, its adjunct account has a normal
debit balance (the same). To debit a normal debit balance means to add.

On the other hand:

o If an account has a normal credit balance, its contra account has a normal
debit balance (the opposite). To debit a normal credit balance means to deduct.
o If an account has a normal credit balance, its adjunct account has a normal
credit balance (the same). To credit a normal credit balance means to add.

Example of accounts with contra accounts:

ACCOUNT RELATED ACCOUNT

ACCOUNTS Allowance for bad debts

RECEIVABLE Type of account: CONTRA
ACCOUNT
Accumulated depreciation - building
BUILDING Type of account: CONTRA
ACCOUNT
Accumulated depreciation -
equipment
EQUIPMENT
Type of account: CONTRA
ACCOUNT

Reference: Financial Accounting and Reporting (fundamentals) by Zeus Vernon B. Millan

 Exercises
I. Multiple Choice
1. Business transactions are initially recorded in the
a. journal c. scrap paper
b. ledger d. notebook
2. When two debits get together the result is
a. addition c. multiplication
b. deduction d. love and happiness
3. An increase to an account is recorded
a. in the debit side of the account
b. in the credit side of the account
c. in the side of that account that represents its normal balance
d. beside the account
4. The minimum balance is zero. In accounting, a negative balance in an account
is referred to as
a. contra balance c. not balance
b. crazy balance d. abnormal balance
5. Baanak uses special journal. Baanak borrows money from the Nakbaa and
issues a note payable. Baanak will most likely record this transaction in the
a. Sales journal c. Cash Receipts Journal
b. Purchase Journal d. General Journal
6. Goods that are held for sale by a business
a. cash c. accounts receivable
b. accounts payable d. inventory
7. Receivables that are supported by written or formal promises to pay in the form
of promissory notes.
a. inventory c. notes payable
b. accounts receivable d. notes receivable
8. The cost of supplies used in an accounting period
a. prepaid supplies c. supplies expense
b. supplies cost d. surprise expense
9. The cost of promotional or marketing activities during the period
a. marketing expense c. groceries
b. advertising expense d. talent fee
10. Income collected in advanced but not yet earned
a. unearned income c. sales
b. early income d. service fee

Reference: Financial Accounting and Reporting (fundamentals) by Zeus Vernon B. Millan

II True or False

1. The difference between the total debits and credits in an account represents the
balance of that account.
2. If the total credits in an account exceeds the total debits, the account would have
a debit balance.
3. Debit refers to the right side of the account while the credit refers to the left side
of the account.
4. Liability, Equity and Expenses account are income statement accounts.
5. Accounts receivable represents receivables supported by oral or informal
promises to pay.
6. The two books of accounts are debit and credit
7. If a business does not utilize special journals, all its transactions are not recorded
in the general journal.
8. To debit means to increase
9. Accounts receivable has a normal debit balance.
10. An account with a normal credit balance is increases by debiting it.

Reference: Financial Accounting and Reporting (fundamentals) by Zeus Vernon B. Millan