THE FIVE MAJOR ACCOUNTS

The five major accounts, also called the elements of the

financial statements, are actually the items in the expanded accounting
equation.

1. ASSETS
a. are the economic resources owned and controlled by the
firm/company.
b. is a resource controlled by the enterprise as a result of
past events and from which economic benefits are
expected to flow to the enterprise. The benefits
embodied in an asset may flow to the enterprise in
a number of ways. The parts of the definition of
an asset can be explained further:
-“controlled by the enterprise” control is the ability to
obtain the economic benefits and to restrict the
access of others(e.g., an entity being the sole user of its
plant and equipment, or by selling idle assets)
-“past events” the event must be past before an asset can
arise. For example, equipment will only become an asset
when there is the right to demand delivery or access to the
asset’s potential.
-“future economic benefits” these are evidenced
by the prospective receipt of cash. This could be
cash itself, an accounts receivable or any item maybe sold.
-May include cash, cash equivalents, notes receivable,
accounts receivable, inventories, prepaid expenses,
property, plant and equipment, investments, intangible
assets and other assets
2. LIABILITIES
a. are the obligations of the company arising from past events
which are to be settled in the future. These represent what
the company owes to other people, organization, and financial
institutions.
b. a present obligation of the enterprise arising from
past events, the settlement of which is expected to
result in an outflow from the enterprise of resources
embodying economic benefits. The parts of the
definition of a liability can be explained further:
 - “Obligations” these may be legal or not. For example the
year-end tax liability relates to the year’s (i.e.past)
events but in law this liability does not arise until it is
assessed sometime later
- “transfer economic benefits” this could be a
transfer of cash, or other property, the provision of a
service or the refraining which would otherwise be
profitable.
-“Complementary nature of assets and liabilities” as
should be evident from the above, assets and liabilities are
seen as mirror images of each other.
-Include notes payable, accounts payable, accrued
liabilities, unearned revenues, mortgage payable, bonds
payable and other debts of the enterprise

3. EQUITY OR OWNER’S EQUITY (CAPITAL, NET ASSETS OR NET

WORTH)

a. The residual interest in the assets of the enterprise after

deducting all its liabilities

b. Equity may pertain to any of the following

depending on the form of business organization:

-Sole proprietorship there is only one owner’s equity account

because there is only one owner

-Partnership, an owner’s equity account exists for each

partner

-Corporation, owner’s equity or stockholder’s equity consists

of sharecapital, retained earnings and reserves
representing appropriations of retained earnings among
others

4. INCOME

a. Is increases in economic benefits during the period

in the form of increases in assets, or decreases in
liabilities, that result in increases in equity, excluding
those relating to investments by the business owner.

b. Income includes both revenue and gains.

 -Revenue arises in the course of the ordinary
activities of a business ,e.g., sales and service fees

-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

a. Are decreases in economic benefits during the period

in the form of decreases in assets, or increases in
liabilities, that result in decreases in equity, excluding
those relating to distributions to the business owners.

b. Expenses include both expense and losses.

-Expenses arise in the course of the ordinary

activities of a business.

-Losses represent other items that meet the definition of

expenses and may or may not arise in the course of the
ordinary activities of the entity.

CLASSIFICATION OF ASSETS

CURRENT ASSETS

-are assets that can be collected, sold, and even used up to one
year after year-end date.

-It expects to realize the asset, or intends to sell or consume it, in

its normal operating cycle.

-It holds the asset primarily for the purpose of trading

-It expects to realize the asset within twelve months after the
reporting period
 -The asset is cash or a cash equivalent unless the asset is
restricted from being exchanged or used to settle a liability for at least
twelve months after the reporting period

Current Assets include:

a. Cash - is any medium of exchange that a bank will accept for

deposit at face value. It includes coins, currency, checks,
money orders, bank deposits and drafts.

b. Cash Equivalents - these are short-term, highly liquid

investments that are readily convertible to known amounts of cash and
which are subject to an insignificant risk of changes in value.

c. Notes Receivable - a written pledge that the customer will pay

the business a fixed amount of money on a certain date. The amounts
due from client supported by a written note or promise.

d. Accounts Receivable – are amounts due from customers

arising from debts. These are claims against customers arising from
sale of services or goods on credit. This type of receivable offers less
security than a promissory note.

e. Inventories - these are assets which are (a) are assets held for
resale in the course of the business; b) in the process of production for
such sale; or (c) in the form of materials or supplies to be
consumed in the production process or in the rendering of services.

f. Supplies - are items purchased by an enterprise that is unused as

of the reporting date.

g. Prepaid expenses – are advance payment of expenses. It is an

asset because the business avoids having to pay cash in the
future for a specific expense. These include insurance and rent.

These prepaid items represent future economic benefits-assets-

until the time these start to contribute to the earning process; these,
then, become expenses.

-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

 h. Short-term investments – are the investments made by the
company that is intended to be sold immediately.

NON-CURRENT ASSETS

-are assets that cannot be collected, sold, and even used up to

one year after year-end date.

Non-current Assets include:

a. Property, Plant & Equipment – are long-lived assets that have

been acquired for use in operations. These are tangible assets
that are held by an enterprise for use in the production or supply
of goods or services, or for rental to others, or for administrative
purposes and which are expected to be used during more than one
period. Example: Land, Building, Machinery & Equipment,
Furniture and Fixtures, Motor Vehicles and Equipment

-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.

-Equipment – consists of various assets such as:

Machineries and other factory equipment

Transportation equipment, e.g., vehicles, delivery trucks

Office equipment, e.g., desks, cabinets, chairs

Computer equipment, e.g., server, personal computers,
laptops

b. Long-term investments – are the investments of the firm made

for long term purposes.
c. Accumulated depreciation - it is a contra account that contains
the sum of the periodic depreciation charges. The balance in this
account is deducted from the cost of the related asset-equipment or
buildings-to obtain book value.
d. Tangible Assets - are physical assets in the form of cash,
furniture and fixtures, and supplies.
e. Intangible Assets – are non-physical assets in the form of
trademarks and patterns. These are identifiable, nonmonetary
 assets without physical substance held for use in the production or
supply of goods or services, for rental to others, or for
administrative purposes. These include goodwill, patents,
copyrights, licenses, franchises, trademarks,
brandnames, secret processes, subscription lists and non-
competition agreements.

CLASSIFICATION OF LIABILITIES
CURRENT LIABILITIES
-It expects to settle the liability in its normal operating cycle;
-It holds the liability primarily for the purpose of trading;
-The liability is due to be settled within twelve months after the
reporting period;
-The entity does not have an unconditional right to defer
settlement of the liability for at least twelve months after the
reporting period
-are those that reach its due date for payment (paid, recognize,
as revenue) within one year after year-end date.
a. Accounts Payable - are amounts due or debts to the
supplier for goods purchase or for services received on account. This
account represents the reverse relationship of the accounts receivable.
By accepting the goods or services, the buyer agrees to pay for them
in the near future

b. Notes Payable - are amounts due to third parties

supported by a written note or promise. It is like a note receivable
but in a reverse sense. In the case of a note payable, the business
entity is the maker of the note; that is, the business entity is the party
who promises to pay the other party a specified amount of money on
a specified future date.

c. Accrued Expenses or Accrued Liabilities - amounts owed to

other for unpaid expenses. This account includes salaries
payable, utilities payable, interest payable and taxes payable. These
are expenses incurred but not yet paid.

Interest payable – interest incurred but not yet paid.

Interest payable arises from interest-bearing liabilities. For
example, you will incur interest on your bank loan.

Salaries payable – salaries already earned by employees but

not yet paid by the business.
 Utilities payable – utilities (e.g., electricity, water,
telephone, internet, cable TV etc.) already used but not yet paid.

(It should be noted that future interest, salaries and utilities are
not recorded. These items must be incurred first before they are
recorded for interest, there must have been a passage of time; for
salaries, the services must have already been rendered; and for
utilities, they must have already been used)

d. Unearned Income – cash or payment collected in advance.

When the business entity receives payment before providing its
customers with goods or services, the amounts received are
recorded in the unearned revenue account (liability method). When
the goods or services are provided to the customer, the
unearned revenue is reduced and income is recognized.

HINTS: The word “receivable” connotes an asset, while the word

“payable” connotes a liability. The word “prepaid” connotes an asset,
while the word “unearned” connotes a liability.

NON-CURRENT LIABILITIES

are those that do not reach its due date for payment, (paid, recognized
as revenue) within one year after year-end date.

Non-current Liabilities include:

a. Loans payable - is a contract wherein the owner of the property

gives the right to use it to another party in exchange for an interest
payment and gives back the property at the end of their contract. It is
documented by promissory note. And in the case, there is still a portion
which is unpaid as of the date of a company's balance sheet, the
remaining balance on the loan is called a loan payable.

b. Mortgage payable - is the liability of a property owner to pay a

loan that is secured by property and from the borrower’s point of view.
The mortgage is considered as long-term liability. Some part of the
debt that is payable within the next 12 months is classified as a short-
term liability. The remaining unpaid principal will be the total amount
due of the loan. this account records long-term debt of the business
entity for which the business entity has pledged certain assets
as security to the creditor. In the event that the debt
 payments are not made, the creditor can foreclose or cause
the mortgaged assets to be sold to enable the entity to settle
the claim.

c. Bonds payable - business organizations often obtain

substantial sums of money from lenders to finance the acquisition of
equipment and other needed assets. They obtain these funds by
issuing bonds. The bond is a contract between the issuer and the
lender specifying the terms of repayment and the interest to be
charged.– obtain these funds by issuing bonds.

d. Installment Contract payable - these are amounts

payable after one year from the Statement of Financial
Position date on long-term installment notes such as those
signed by the consumers when buying automobiles and
household appliances.

OWNER’S EQUITY

Sometimes called capital or proprietorship, is the excess of assets

over liabilities of a business.

There are two (2) important elements that comprised the equity:

Capital – is the worth of cash and other assets invested in the

business. (from the Latin capital is, meaning “property”) This account
is used to record the original and additional investments of the owner
of the business entity. It is increased by the amount of profit
earned during the year or is decreased by a loss. Cash or other assets
that the owner may withdraw from the business ultimately reduce it.
This account title bears the name of the owner.

Drawing or Withdrawals– is an account debited for assets withdrawn

by the owner for personal use from the business. When the owner of a
business entity withdraws cash or other assets, such are recorded in
the drawing or withdrawal account rather than directly reducing the
owner’s equity.
INCOME OR REVENUE

is the increase in resources resulting from the performance of service

or selling of goods.

Income or Revenue Accounts

a. Service Income or Service Fees - revenues earned by

performing services for a customer or client; this represents the
inflow of cash or non-cash assets arising from services rendered; for
example, accounting services rendered by a CPA firm, laundry
services by a laundry shop.
b. Sales - revenues earned as a result of sale of merchandise.
c. Professional Fees - these indicate income from rendering
professional services without specifying the particular nature of
professional service rendered.
d. Medical Fees - these fees are the income received from
rendering medical services.
e. Legal Fees - these fees refer to income received from
rendering legal services
f. Dental Fees - these refer to income received from rendering
dental services
g. Accounting Fees - they refer to income received from rendering
accounting services.
h. Management Fees - they refer to income received
from rendering various management consultancy services.
i. Interest Income – revenues earned from the issuance
of interest-bearing receivables.
j. Gains – income earned from the sale of assets (except inventory)
or from enhancements of assets or decreases in liabilities that are
not classified as revenue.

EXPENSE
 the decrease in resources resulting from the operations of
the business.

Expense Accounts

a. Cost of Sales - the cost incurred to purchase or to produce the

products sold to customers during the period; also called cost of
goods sold Expense
b. Salaries or Wages Expense - includes all payments as
a result of an employer-employee relationship such as
salaries or wages, 13th month pay, cost of living allowances and
other related benefits.
c. Rent Expense - this refers to the rental cost of office space,
equipment or other asset rentals
d. Office Supplies Expense - this refer to the cost of office
stationery like bond papers, carbon papers, typewriters or
computer ribbons, envelopes, pencils, ball pens, and other office
supply items that are consumed in the business operations.
e. Taxes and License Expense - this refer to all payments
required to be made to the Bureau of Internal Revenue and the
Municipal Treasurer for privilege taxes, mayor’s permits, municipal
taxes and licenses, business taxes, and others.
f. Transportation Expense - this is the cost incurred by office
employees when commuting from the office to the place of
business of clients. Also included here are transportation
fares from the office to any place required for any official
business. Represent the necessary and ordinary cost of employees
getting from one workplace to another which is reimbursable by the
business, e.g. reimbursable taxi fares of employees running some
errands and those who are working on late shifts.
g. Travel expenses – represent the costs incurred when travelling
on business trips, e.g., out-of-town travel costs of employees sent
to seminars.
h. Gas and Oil Expense - this refer to the cost of gas
and oil consumed whenever transportation vehicles or
company cars are used in official business trips.
i. Representation Expense - this is the cost incurred
when entertaining clients or prospective clients. Included are the
costs incurred when office employees represent the firm in some
official functions.
 j. Insurance Expense - portion of premiums paid on insurance
coverage (e.g.,on motor vehicle, health, life, fire, typhoon or flood)
which has expired.
k. Depreciation Expense - the portion of the cost of a tangible
asset (e.g.,buildings and equipment) allocated or charged
as expense during an accounting period.
l. Bad debts or Doubtful Account Expense - cost of allocation or
provision for this future uncollectible of some of the accounts of
credit customers; also known as Uncollectible Accounts Expense
m. Interest Expense - an expense related to use of borrowed
funds.
n. Utilities expense – represents the cost of utilities (e.g.,
electricity,water, telephone, internet, cable TV etc.) that have been
used during theaccounting period.
o. Advertising expense – represents the cost of
promotional or marketing activities during the period.
p. Miscellaneous Expense – represents various small
expenditures which do not warrant separate presentation.
q. Losses – expenses which may or may not arise from the ordinary
course of business activities. Losses may arise from: Sale of assets,
other than inventory, at a sale price that is less than the carrying
amount. Decreases in the value of assets due to
destruction, damage, obsolescence and other changes in
values caused by market factors, e.g., loss on fire, earthquake,
storm, and other calamities, decrease in the value of foreign
currencies held due to changes in exchange rates.
r. Freight-out – represents the sellers’ costs of delivering
goods tocustomers. Other terms for freight-out are
“delivery expense”, transportation-out”, and “carriage outwards”.

CHART OF ACCOUNTS

-a list of all accounts used by companies in their financial

records.

-It does not show any peso amounts.

-It is a reference list that shows the account name and the
corresponding account number if numbers are used. For most
businesses, the chart of accounts arranges all accounts
according to five major classifications.