The Five Major

Accounts and Chart

of Accounts
Objectives:

1. identify and discuss the five major

accounts namely: assets, liabilities,
capital, income and expenses.
ABM_FABM11-IIId-e-19
2. prepare a chart of accounts
(ABM_FABM11-IIId-e-21)
WHAT IS AN ACCOUNT TITLE?
Account titles are identifications or brief
descriptions of items that fall to 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”.
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.
 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
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
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”.
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.
 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.
 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
 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 – 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
decrease 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 name
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 - 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 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 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 COST
 Cost of Sales or Cost
of Goods Sold
- refers to cost to produce and sell
the merchandise.
 Freight-In

refers to transportation cost incurred

in buying good
 Purchases
the account title for "merchandise"
purchased under the periodic
inventory system. Under perpetual
inventory system, the account title is
"merchandise inventory".
5. EXPENSES
 Freight-Out
refers to transportation cost of
merchandise sold.
Supplies Expense
this represents 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.
 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 ACCOUNT
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.
RECORDING &
CLASSIFYING
Learning Objectives:

At the end of this lesson, you are

expected to:
a. apply the rules of Debit and Credit in
recording business transactions; and
b. post properly recorded transactions.
 Needed
Accounting
Terms/Concepts
 1. Normal Balance
The normal balance of an account is
the side of the account that is
positive or increasing. The normal
balance for asset and expense
accounts is the debit side, while for
income, equity, and liability accounts
it is the credit side.
 2. Duality Principle
Transactions are always
reflected as effects on at
least TWO elements.
 3. Transaction
A deal or bilateral agreement with
another entity in which the business
enters as a counterparty.

Examples: sales, purchase,

exchange of properties, borrowing,
lending.
 4. Event
The happening or occurrence that may have
favorable or unfavorable impact upon the asset,
liability, or capital of the entity.

Examples: calamities such as earthquake, storm,

COVID19. Fortuitous events such as fire,
shipwreck, theft, robbery. Birth or increase in value
of animal or plant assets. Increase or decrease in
value of investments. Accrual of income or expense.
 5. Recognition
The act of recording
transactions.
 6. Bookkeeper
The person in charge of
maintaining the records of
the entity and performs the
recording function.
 7. Business documents
Also known as source
documents, are original
records of a transaction and
are the primary source of
journal entries.
 8. Simple entry
An accounting entry
composed of one debit and
one credit
 9. Compound entry
An accounting entry
compose of one or more
debit, or one or more credit.
The Rules of
Debit and
Credit
1. The Debits must always EQUAL
Credits. The two-fold effect of a
transaction or an event is always
recorded in accounting as a debit and
credit. For every debit, there must be a
matching credit. Hence, this recording
method is called the “double entry
system”.
2. An increase in asset and
expense must be recorded as a
debit (normal balance). An
increase in liability, capital, and
revenue must be recorded as a
credit (normal balance).
3. A decrease in asset and
expense must be recorded
as a credit. A decrease in
liability, capital, and revenue
must be recorded as a
debit.
4. Debit will be recorded
first before the Credit.
Recording Phase in the
Accounting Cycle
Recording phase, also known as journalizing
involves the chronological recording of
transactions in the entity’s book called “journals”.

Recognition is the act of recording transactions

where recognition principles discussed in the
earlier modules are applied.

The bookkeeper is the person in charge of

maintaining the records of the entity and performs
the recording function.
 Procedures in Recording:

1. Identify accountable
transactions or events
Only accountable transactions or events
are recoded in the books of the entity. One
entry is required for each accountable
transactions or events. A transaction or
event is said to be accountable when it
caused a measurable change in an asset,
liability, capital, income, or expense of the
business.
2. Measure accountable transactions or
events
Measurement of Accountable Transactions:

In accounting, measurement of accountable

transaction is guided by this maxim:
“ Value received = Valued parted with ”
Rules in measurement:

A. If entity gives asset – use Historical Cost Principle

General Rule: Value of the asset received is
measured at the book value of asset given up, if the
entity doesn’t receive assets in return.

Exception to the GR: If the entity receives another asset

in exchange.
a) Non-Cash asset received is valued at the fair value
of asset given up (FVAGU)
b) Cash received is always measured at its fair value
which is equal to its face value.
Rules in measurement:

B. In cases where entity doesn’t give

asset – use the Fair Value Principle
a) Only rule – Value received shall be
measured at the fair value of the item
received since there is no Value parted
with.
Fair value, also known as the fair market value is
the price at which an independent and willing buyer and
willing seller exchange items in arm’s length transaction.
According to IFRS 13, it is the price that would be
received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the
measurement date.

Book values, also known as the carrying value, is

defined as the recorded value of an asset in the
accounting books of the entity.
3. Record accountable
transactions or events in the
accounting journal
Example:

1. The owner invested ₱100,000 cash to

the business. He also invested additional
₱50,000 cash that was borrowed from a
friend and issued a promissory note due in
one year.
2. The business
purchased a ₱30,000
equipment on account