Chart of Accounts

In Accounting, you will commonly see the term chart of accounts. This is the term used for how companies name
transactions. It also groups up these transactions into the components of the Accounting Equation. They are assigned
codes that are used in the ledger of the company. A ledger is another type of financial document that you will learn about
in this section. Some of the common Chart of Accounts title would be cash, accounts receivable, accounts payable, capital
(also known as equity or common stock), drawings, and revenue (also referred to as sales). In this Chart of Accounts, you
can look at the different meaning of the different accounts title used so that you can evaluate your transactions and classify
them based on the chart of accounts that we will use.
Remember that this will not always be the same as different companies may have more specific account titles. Generally,
the bigger the company is, the more elaborate their chart of accounts will be. For example, a smaller company may use the
account title cash to contain all transactions that involve the use of cash. Meanwhile, larger companies uses the following
terms: petty cash, cash in bank, and cash on hand to further describe cash transactions.

Cash
Cash is one of the most fundamental account titles used as all transactions will eventually involve cash. For our activity,
any transaction that involves the use of cash will be titled as cash transactions. For example: a company buys equipment
worth P50,000. The company will pay for half of it using a credit card. In this scenario, cash will be used for P25,000 of
that equipment purchase

Accounts Receivable
Accounts receivable is another very common account title. Essentially, what Account Receivable means is that someone
owes you money to be paid, usually within a 30 day time frame. Most companies will have terms regarding their Accounts
Receivables, giving discounts when the receivables is paid at an earlier time than the usual 30 day time frame. For
Example; a large company orders 250,000 units of iPhone 6s, at factory price. Let’s say that’s it’s worth P30,000 each.
That would be the total of P7.5B (billion). Let’s face it, no one carries that much cash around. What Apple will do is they
will ship these devices to the customer and they will have a receivable amount of P7.5B which then can be paid within 30
days. Apple will then have an Accounts Receivable of P7.5B. Some companies further categorize their Accounts
Receivable by adding a hyphen at the end with the company name. This helps companies track which customers still owe
them money.

Equipment
Equipment would contain items that are used in the operation of business. Things like cash registers and computers would
be classified under this account title. These objects are not items that are up for sale but are used for the business to
function properly. These are generally items that are used for longer periods of time or for their entire usable lifetime.
These items are usually depreciated at the end of an accounting period. Depreciation is a concept that you will learn in
Accounting Management 2.

Furnitures and Fixtures

These items are also like equipment that are not sold to customers but aid in the generation of income. This would include
things like office desk, chairs, cabinets, etc.

Accounts Payable
Accounts Payable would be the reverse of Accounts Receivable in the sense that this means that your company owes
money to someone else. Similar to Accounts Receivable, this usually spans 30 days for payment to be completed, with a
discount of paying early. This is usually an arrangement between companies to pay for goods and services.
Let’s say for an example: Your company buys fabric, which is a material that you use for production, worth P2.5M. Your
supplier will account that as an Account Receivable. So as an Accountant, you will always think of money as coming
from or going to your company.
Now, if your company decides to apply for a loan from a bank, this would not be as an Accounts Payable, as loans are
generally paid over longer period of time and would have the account title, Loans Payable.

Supplies
Supplies are also not directly sold to customers but are used by the company to generate income. Supplies would generally
include items such as envelopes, bond paper, markers, etc. When companies buy these items, they are normally in bulk
and stored until it is used up. These are not usually stored for a long periods of time, usually expected to be used by the
end of the month or quarter.

Discount
Discount is actually classified as contra-revenue account, meaning it is against revenue. Let’s say for example a product
that you sell is sold at the price of P500 and you give your customer a discount of 10% or P50. Your company would still
generate a sale of a product worth P500, but you would only receive P450 cash. The other that is missing would then be
classified as a discount.

Notes Payable
This account title is similar to Accounts Payable and that it would be an amount that will need to be paid. However, the
terms of and when the payment must be paid is clearly defined in a document called the promissory note. This is signed
by the person who owes the money making them more financially liable for the amount.

Capital
Capital is often accompanied by a name such as Raffy Reyes, Capital or Capital – Raffy Reyes. This is to denote
ownership in the organization. When a business owner puts his own money into his company for company to use to gain
assets and make profit, he gains ownership over that part of the business. In sole-proprietorship, this is easy to determine
as the cash investment mainly comes from the owner. In corporations, ownership can be labeled as common stock since
there is more than one person with ownership in the business.

Drawing
There are cases wherein a business owner will have to take money out of the business. This is when a drawing occurs.
Essentially, the owner withdraws part of his share in the business. For example, an owner who has P200,000 as capital in
the business can choose to withdraw P25,000 of cash from the business that he will spend in paying for a new car for
himself. Since, his purchase is not directly used in any type of business operation, unless he were a sales agent and would
have to travel to different locations for the business, he now only owns P175,000 of the business instead of P200,000.

Service Revenue
As the name entails, service revenue is something that is earned by providing a service. For example, someone pays you
to cut their grass for them. That is a service revenue since there isn’t actually a product that is being bought. What people
are going to pay for is to have you cut their grass.

Marketing Expense
These are expenses that are incurred through promotion of your company’s brand. It can involve items such as: hiring a
marketing expert, advertising, creating a brand profile, etc.

Utilities Expense
Utilities Expense, accounts for payments made to operational utilities such as water, electricity, and phone service

Supplies Expense
Supplies Expense is tied directly to supplies. Remember that supplies are usually stored when it is bought and are
generally expected to be used up within a certain period. When you use up supplies, your amount of supplies lessen but
you no longer have to pay cash for them since you have already paid cash when you bought the supplies.

Salaries Expense
Any employee of the company will generally earn a fixed salary. This Account will contain the bulk of that amount.
 Rent Expense
In our scenario, rent expense will be used to account for the rental of the office property. A company that does not have its
own land and building will have an account titled Rent Expense.

Retained Earnings
Retained Earnings is the account title that is used to record the net income at the end of the accounting period, that goes
back into the business. For example: at the end of the year, a business has a Sales Revenue of P100,000 and a total of
P25,000 in expenses. In a Sole Proprietorship type of business, once you deduct the P25,000 from the P100,000
(equivalent to P75,000), that will be reinvested into the business and called Retained Earnings. Retained Earnings is
equivalent to your Income Summary account which is the next item from the list.

Unearned Revenue
Unearned Revenue, although it has the word revenue, it is actually considered a liability account. This is when a company
has already paid for a service that you have not yet rendered so you would still owe someone the service.
For Example: you are an event organizer and you have been asked to organize a birthday party by a client next month with
a budget of P45,000 in advance. You already have the cash but not have yet performed so this is tagged as an unearned
revenue. It will change into service revenue, once you have completed the service, the following month.

Income Summary
Income Summary is an account title that is only used at the end of an accounting period. All revenue accounts and
expense accounts are eventually closed at the end of an accounting year. That being the case, when these entries are
closed, they are close into the income summary account. This is not something that you will get based on a transaction in
business, but a title only used at the end of the period which will also be closed out to Capital or Retaining Earnings.
For example, at the end of the year, a business has a Sales Revenue of P100,000 and a total of P25,000 in expenses. In a
sole proprietorship type of business, once you deduct the P25,000 from the P100,000 (equivalent to P75,000), you will get
the amount that will be in the Income Summary. The income summary does not have a normal balance.

Prepaid Insurance
Prepaid Insurance is a type of current asset whereby insurance for a given period is paid in advance. It is related to the
account title Insurance Expense as when the period expires the Prepaid Insurance is adjusted in order to reflect part of it
being used up.

Purchases
Purchases is an asset account that shows the purchase of additional goods to be sold. This account title is used in the
Periodic Inventory System. Even though this is an asset account, this is actually considered as a temporary account and
will need to be closed out at the end of the year in order to obtain the Inventory account title which will be used ass the
beginning inventory for the next accounting period.

Purchase Returns and Allowances

This is a contra-asset account to purchases. This is used when a good that is bought by a company is returned to the
supplier. This only appears in the Periodic Inventory System.

Purchase Discounts
This is another contra-asset account for the title, Purchases. Usually when a purchase is made, there are terms in which
payment must be made. If payment for the purchase is made early, there is usually a discount for the purchase.

Merchandise Inventory
Merchandise Inventory is an account title used in the Perpetual Inventory System. It is the account title used to record any
addition or reduction in the inventory size for the Perpetual Inventory System.

Loans Payable
Normally, the account title used for liabilities is Accounts Payable. In instances where the amount owed is going to be a
large amount, such as for the purchase of land or a commercial building, companies may opt to borrow money from
another institution and pay a loan which is paid for longer periods of time. When this takes place it is usually in the form
of a loan. A loan is when an amount borrowed and the terms of payment are clearly defined along with the interest to be
paid on top of the amount borrowed. The terms of payment is at least for one year which makes this account title a Long
Term Liability.

Sales
Sales is a revenue account title that is used in the Periodic Inventory System. It is used for account for income coming
from the selling of products. This account title is only used for the recording of the revenue coming and not for the
changes in the value of the inventory. In the Periodic Inventory System, changes for the inventory are accounted for at the
end of a particular accounting period using a different account title.

Sales Returns and Allowances

This account title is a contra-revenue account that is used to record when a customer returns a product that was sold to
them. This account has a normally debit balance. This is eventually closed out of the accounting period.

Sales Discounts
This is another contra-revenue account for the account tile, Sales. This is used to account for discounts received for
customer who have paid for goods they have bought early. This is associated with the terms of sales that are indicated
during purchase.

Insurance Expense
This is an expense account used to account for using up the coverage of insurance. This means that when insurance is
purchased, it usually covers a certain period, like a month. When that month expires the coverage of the insurance is also
used up. Once the insurance is already used up, it is tagged as an expense.

Freight In
Freight in is a type of expense account that is usually associated with purchase of additional inventory or raw materials.
This is expense used when upon the purchase of goods or raw materials, your company will have to shoulder the
transportation cost of getting the goods or materials. This charge will appear in your company’s books of purchases with
FOB Shipping Point. This only appears in the Periodic Inventory System as in the Perpetual Inventory System, the charge
appears as part of Merchandise Inventory.

Freight Out
Freight Out is type of expense that is associated with selling of goods and materials. This expense is used to account the
transportation cost of the goods when sending them out to customers. This charge will appear in your company’s books if
it is FOB Destination.

Cost of Goods Sold

On its own, Cost of Goods Sold (COGS) is the term used to refer the expenses that a business incurs for the products that
they are selling. If used as an account title, it is used in the Perpetual Inventory System to record the expense for the
selling of the good or product. Essentially, in the Perpetual Inventory System, there are two transactions during a sale; the
first one is to account for the Sale and the second is to account for the Expense of the sale.