Definitions, Classifications and Examples of Accounts

REAL ACCOUNTS
-are Assets, Liabilities and Owner’s equity. Reals accounts are reported in the SFP.
They are not closed at the end of the accounting period.

*The Assets Accounts

Assets- are resources or things of value owned by an enterprise. Some of them have
physical form (such as cash and inventory), but others have no physical form (such as
patents and copyrights). For as long as future economic benefits are expected from them to
flow the entity and if they are controlled by the entity, they are assets.

Generally, they are recorded in the books of accounts with a normal debit balance.

Current Assets.
a. It is a cash or cash equivalent which is not restricted for current use.
b. It is expected to be realized, or held for sale consumption in the normal course of
the enterprise’s operating cycle.
c. It is held primarily for trading purposes or the short term expected to be realized
within 12 months of the SFP date.

If an asset does not meet any of the following criteria above, then it shall be classified as
noncurrent.

The operating cycle of a business is the time between the acquisition of materials entering
into a process and its realization in cash or an instrument that is readily convertible into
cash.

Examples
a. Cash- any item on hand with a monetary value that a bank will accept for deposit
and all amounts currently on a bank in the name of the business. This includes
coins and currencies, personal checks, money orders, travelers checks made
payable to the business and bank drafts. Also included are funds that are
currently on deposit at bank and readily available as checking and savings
account.
b. Accounts receivable- the amounts collectible on open accounts of the customers.
These represent debtor’s oral promise to pay certain amount to the business and
the right of the business to collect certain amount in peso.
c. Notes receivable- a promissory note received by the business from its debtors or
customers. A written promise to pay a certain amount on a specified or
determinable date.
d. Accrued interest receivable- the interest earned on note receivable but not yet
received in cash.
e. Inventories- assets held for sale in the normal operation of the business, in the
process for production for sale, or in the form of materials to be consumed in the
production process or in the rendering of services. Examples are the merchandise
inventory; work in process inventory and raw materials inventory.
f. Prepaid supplies- various supplies which have been bought for use in the office
but are still unused. (Ink, bond paper, ball pen, janitorial supplies)
Non-current Assets
a. Land- the site owned by the business on which the business building is
constructed. This plant asset is not subject to depreciation. All other plant assets
are subject to depreciation.
b. Building- the structure owned by the business in the operation of the business.
c. Furniture and fixture- long lived items used by the business including store
furnishings, such as showcases, counter, containers, display racks, as well as
furniture’s used for office purposes such as desk chairs and cabinets.
d. Equipment- consist of what generally might be called machinery used in a
business, such as computers, delivery equipment of any sort, or machinery used
in conveying, packing, sorting or altering the commodities handled.
Contra-ValuationAccounts
a. Allowance for doubtful accounts- refers to an amount estimated uncollectible on
receivable in compliance with the principle of conservatism. It is credited to serve
as a contra account for the related receivable. Other terms used to describe this
account are “allowance for uncollectible account” and “allowance for bad debts”.
b. Accumulated depreciation- the aggregate periodic cost of using a plant asset. In
accordance with the systematic cost allocation principle, the acquisition cost of
depreciable plant asset should be allocated as expense over its useful life.

*The Liability Accounts

Liabilities- are present obligations to pay cash or cash equivalents by an entity. In other
words, they are present claims against the asset of the business.

Current liability
a. It is expected to be settled in the normal course of the enterprise’s operating cycle.
b. It is due to be settled within 12 months of the SFP date.

Examples
a. Accounts payable- an obligation o debt to creditors for money borrowed or
merchandise and other assets bought on credit.
b. Notes payable- a promissory note issued by the business to its creditors for
money borrowed or merchandise and other assets bought on credit.
c. Accrued interest payable- in interest incurred in the current period but not yet
paid.
d. SSS premium payable- representative of the amount of employee and employer
contribution to SSS which are not yet remitted to SSS.

Noncurrent liability is one that does not meet the criteria of a current liability. Generally,
it comprises the portion beyond one year of a long-term liability.

*Owner’s Equity Accounts

Owner’s Equity- the residual amount after deducting liabilities from assets. It comprises
the capital contribution and withdrawals by the owner. It is increased by the capital
contribution of the owner and net income of the business, and decreased by the owners
withdrawals and net losses of the business.

*drawings- is a temporary account used to record initially the amount taken by the owner
from the business.

NOMINAL ACCOUNTS

Nominal accounts- are those that comprise the elements of Income statement- the revenue
and expense account. These accounts are called temporary because they are closed or put
to zero balance at the end of the accounting period.

*The Revenue Accounts

Examples
a. Sales- an account used to summarize sale of goods of a trade or merchandising
business to its customers. This includes cash and on account services.
b. Professional fees- the earnings derived from the services rendered by professional
or professional servicing firm to its clients which could be in cash or in collectibles.
c. Interest income- the earnings representing the time value of money derived from
the promissory notes received by the business, whether in cash or collectible in the
future.
d. Rent income- the income earned from allowing the others to use the facility or
property of the business.
e. Gain on sale of other assets- the income derived from the sale of assets used in
the business operation. There is a gain on sale if the proceeds the book value or cost
of the disposed asset.
*The Expense Accounts

Expenses- are costs incurred in conducting the busines activities. It has normal debit
balance.

Examples
a. Cost of sales- the value of merchandised sold.
b. Supplies expense- the amount or supplies consumed by the business during the
period.
c. Salaries and wages expense- the amount paid to services rendered by employees
in the operation of the business.
d. Insurance expense- the amount of insurance policy incurred during the current
period.
e. Taxes and Licenses expense- the cost of local as well as national taxes that are
incurred and required to be paid in connection with the conduct of business.

Estimated expenses
a. doubtful account expense- the estimated amount of losses from
uncollectible accounts arising from credit sales of the current period. This is
also called bad debt expense or uncollectible account expense.
b. depreciation expense- represents the current periodic cost for using
depreciable plant assets. In accordance with the systematic cost allocation
principle, the acquisition cost of depreciable plant asset should be allocated as
expense over its useful life.

*The Owner’s equity (capital)- is the claim of the owner to the assets of the business. It is
the residual amount after the outside creditors’ claim against the total assets of the
business.