TYPES OF MAJOR ACCOUNTS

BASIC ELEMENTS OF ACCOUNTING

a. Financial Position (Balance Sheet).

1. Assets. These are resources controlled by the enterprises as a result of past
transactions or events and from which future economic benefits are expected to
flow to the enterprise.
2. Liabilities. These are present obligations of the enterprise arising from past
transactions or events, the settlement of which is expected to result in an
outflow from the enterprise embodying economic benefits.
3. Equity. It is the residual interest in the assets of the enterprise after deducting all
its liabilities.
b. Results of Operations (Income Statement).
1. Revenues. These are the gross inflows of economic benefits during the period
arising in the course of ordinary activities of an enterprise when those inflows
result in increases in equity, other than those relating to contribution from
owners. They are inflows of future economic benefits that increase equity, other
than contributions or investment by owners.
2. Expenses. These are the gross outflows of economic benefits during the period
arising in the course of ordinary activities of an enterprise when those outflows
result decreases in equity, other than those relating to distribution to owners.
They are consumption or outflows of future economic benefits that decrease
equity, other than distributions or dividends aid to owners.
3. Net Income. It is the amount by which total revenues exceed total expenses for
the period. When expenses exceed revenues, the result is a net loss.

TYPICAL ACCOUNT TITLES USED

Balance Sheet

1. Assets.
a. Current Assets. These are all assets that are expected to be realized, sold or
consumed within the enterprise’s normal operating cycle. Operating cycle is the
interval time from the date of acquisition of merchandise inventory; sell the
inventory to customers and the ultimate collection of cash from the sale.
• CASH. It is any medium of exchange that a bank will accept at face
value. It includes coins, currency, checks, money orders, bank deposits
and drafts. The cash within the premises of the business is CASH ON
HAND while the cash deposited in the bank is CASH IN BANK.
• PETTY CASH FUND. This represent money places and set aside for
“petty” or small expenses.
• CASH EQUIVALENTS. These are short-term, highly liquid investments
that are readily convertible to cash and with original maturities of three
months or less.
 • ACCOUNTS RECEIVABLE. Claims from customers arising from goods
sold or services rendered on credit. It represents the debtor’s oral
promises to pay a client.
• NOTES RECEIVABLE. It is a written pledge that the customer will pay the
business at fixed amount of money on a certain date.
• ALLOWANCE FOR DOUBTFUL ACCOUNTS. This is an “asset offset” or
“contra asset” account which provides for possible losses from
uncollected accounts receivable.
• MERCHANDISE INVENTORY. Goods purchased by the business to be
sold at a profit.
• PREPAID SUPPLIES. Miscellaneous supplies that have been bought for
office use but are still unused as of the balance sheet date.
• PREPAID INSURANCE. Already paid insurance premiums which are
applicable in the future periods.
• PREPAID RENT – rent paid in advance

b. Noncurrent Assets.
• LAND. Land owned and used by the business entity.
• BUILDING. Building owned and used by the business in its operation.
• EQUIPMENT. It records the acquisition and disposition of office
machines, desks, cars, trucks, file cabinets and similar items.
• FURNITURE AND FIXTURES. It includes office tables, chairs, etc.
• Accumulated depreciation – the total amount of depreciation expense
recognized in non-current assets except land

2. Liabilities.

a. Current Liabilities. There are financial obligations of the enterprise which are
expected to be settled in the normal course of the operating cycle; due to be
settled within one year from the balance sheet date.
• ACCOUNTS PAYABLE. Amounts due to the creditors for the goods or
service bought in credit.
• NOTES PAYABLE. Amounts due to the creditors which are supported by
a promissory note.
• ACCRUED LIABILITIES. Amounts owed to other unpaid expenses. These
include salaries payable, interest payable and taxes payable.
• UNEARNED REVENUES. When the business entity receives payment
before providing its customers with goods or services, the amount
received are recorded in the unearned revenue account. When the
goods or services are provided to the customer, the unearned is reduced
and revenue is recognized.
 • Interest payable – interest incurred but not yet paid. Interest payable
arises from interest-bearing liabilities (i.e., you will incur interest on your
bank loan)
• Salaries payable – salaries already earned by employees but not yet
paid by the business
• Utilities payable – electricity, water, telephone, internet, cable TV, etc.
already used but not yet paid

b. Noncurrent Liabilities. These are financial obligation of the enterprises which

are due and payable for more than one year.
• MORTGAGE PAYABLE. This includes long-term debts for the business
entity for which the business entity has pledged certain assets as
security to the creditor.
3. Owner’s Equity – the residual amount after deducting liabilities from assets

Increased by: Decreased by:

- Investments or contributions - Withdrawals or distributions to the
of owner owner
- Income or profit earned by - Expenses or loss incurred by the
business business

Income Statement

1. Revenues.
• SERVICE REVENUE. Revenues earned by performing services for a customer or
client.
• SALES. Revenues earned as a result of sale of merchandise.
• Interest income – revenues earned from issuance of interest-bearing receivables
• Gains – income earned from sale of assets (except inventory) or from
enhancements of assets or decreases in liabilities that are not classified as revenue

2. Expenses.
• COST OF SALES. Cost of goods purchased and sold or materials manufactured and
sold.
• Freight-out – delivery expense
• SALARIES AND WAGES EXPENSE. Payments as a result of an employer-employee
relationship.
• UTILITIES EXPENSE. Amount of telephone, light and water consumed by the
business.
• RENT EXPENSE. Expense for space, equipment or other asset rentals.
• SUPPLIES EXPENSE. Expense of using supplies in the conduct of daily business.
• INSURANCE EXPENSE. Premiums paid on insurance coverage.
 • ADVERTISING EXPENSE – represents the cost of promotional or marketing activities
during the period
• TRANSPORTATION AND TRAVEL EXPENSE
• INTEREST EXPENSE – cost of borrowing money
• DEPRECIATION EXPENSE. The portion of the cost of a tangible asset allocated or
charged as expense during the accounting period.
• DOUBTFUL ACCOUNTS EXPENSE. The amount of receivable estimated to be
doubtful of collections and charged as expense during an accounting period.
• TAXES AND LICENSES. The amount paid for business permits, licenses and other
government dues.
• 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 a
business (i.e., sale of assets other than inventory at a sale price that is less than the
carrying amount)

Illustration:

Assets = Liabilities + Equity

1. Owner invests
P150,000 cash in
business.
2. Purchase office
equipment at
P40,000 on account.
3. Received P12,000
cash for services
rendered.
4. Paid P25,000 for the
account in No. 2
transaction.
5. Billed a customer for
services rendered for
P16,000.
6. Paid P8,000 for
salaries of
employees.

FINANCIAL TRANSACTION WORKSHEET

Every financial transaction can be analyzed or expressed in terms of its effects on the accounting
equation. A financial transaction worksheet is used to analyze increases and decreases in assets,
liabilities or owner’s equity.