Financial Accounting & Reporting

TYPES
OF
MAJOR ACCOUNTS

By: Prof. Ernie D. Tano, CPA, DBA

 The Accounting Equations

Assets = Liabilities + Capital

 The Accounting Equations
Revenue
Assets = Liabilities + Capital
Expenses
 The Accounting Equations
Revenue
Assets = Liabilities + Capital
Expenses

A = L + C + R - E

Expanded Accounting Equation

 The Accounting Elements

Assets BS PERMANENT
OR
Liabilities or
SFP REAL ACCOUNTS
Capital
Revenue IS TEMPORARY
or OR
Expenses SCI NOMINAL ACCOUNTS
 The Account

- Account is the basic storage of information in

accounting.

- A record of the increases and decreases in a

specific item of asset, liability, capital (equity),
revenue (income) or expense.
 The “T” Account

Cash
T-account – is a device Debit Credit
form where the increase
and decrease in a specific
item is recorded
 The “T” Account

Cash
1. Account title – specific Debit Credit
item of elements (ALCRE)

2. Debit side– the left

side of the account

3. Credit side– the right

side of the account
 Normal Balance of Account

Accounts Receivable Accounts Payable

20,000 10 2,000 7 10,000 5,000

6 2,000 11 9,000 11 18,000
11,000 13,000
 Normal Balance of Account

Assets + Expenses = Liabilities + Capital + Revenue

 Normal Balance of Account
Vowels Consonants

Assets + Expenses = Liabilities + Capital + Revenue

 Normal Balance of Account

Normal Balance of an account is the side where that account is increased.

Type of account Normal balance Debit Credit

Asset Debit Increase Decrease

Liability Credit Decrease Increase

Capital (Equity) Credit Decrease Increase

Revenue (Income) Credit Decrease Increase

Expense Debit Increase Decrease

 Chart of Account
Chart of Accounts
BALANCE SHEET ACCOUNTS INCOME STATEMENT ACCOUNTS
Account Account
No. No.
ASSETS REVENUE (INCOME)
110 Cash 410 Service fee
120 Accounts Receivable 420 Sales
125 Allowance for bad debt 430 Interest Income

A chart of 130
140
Notes Receivable
Inventory
440 Gains

150 Prepaid Supplies EXPENSES

accounts is a list 155 Prepaid Rent 510 Cost of Sales
160 Prepaid Insurance 515 Freight-out
of all the accounts 170 Land 520 Salaries expense
180 Building 525 Rent expense
used by a 185
190
Accumulated depreciation-Building
Equipment
530
535
Utilities expense
Supplies expense
business. 195 Accumulated depreciation-
Equipment
540 Bad debt expense

545 Depreciation expense

LIABILITIES 550 Advertising expense
210 Accounts Payable 555 Insurance expense
220 Notes Payable 560 Taxes and licenses
230 Interest Payable 565 Transportation and travel
expense
240 Salaries Payable 570 Interest expense
250 Utilities Payable 575 Miscellaneous expense
260 Unearned Income 580 Losses

CAPITAL (EQUITY)
310 Owner’s capital
320 Owner’s drawings
Drills on Account Titles - ASSETS

Accounts Receivable

A customer bought barbecue worth P500 from your

barbeque business. He told you that he will pay for it
next week
Drills on Account Titles - ASSETS

Accounts Receivable

A customer bought barbecue worth P500 from your

barbeque business. He told you that he will pay for it
next week

The P500 collectible from the customer is recorded as accounts

receivable
Drills on Account Titles - ASSETS

Allowance for bad debts (Allowance for doubtful accounts)

The customer with the P500 account receivable is

broke. You have estimated that you can only collect
P420 from him.
Drills on Account Titles - ASSETS

Allowance for bad debts (Allowance for doubtful accounts)

The customer with the P500 account receivable is

broke. You have estimated that you can only collect
P420 from him.

The P80 (500 – 420) uncollectible account is recorded as bad debts

expense and accumulated in the allowance for bad debts account.
Drills on Account Titles - ASSETS

Notes receivable

Your friend borrowed P1,000 from your barbecue

business. You required from him a written promissory
note to repay the money within 30 days plus 1 %
monthly interest.
Drills on Account Titles - ASSETS

Notes receivable

Your friend borrowed P1,000 from your barbecue

business. You required from him a written promissory
note to repay the money within 30 days plus 1 %
monthly interest.

The P1,000 collectible from your friend is recorded as notes

receivable
Drills on Account Titles - ASSETS

Inventory

You purchased pork worth P1,000 to be marinated and

sold as barbecue.
Drills on Account Titles - ASSETS

Inventory

You purchased pork worth P1,000 to be marinated and

sold as barbecue.

The cost of the pork purchased is recorded as inventory.

Drills on Account Titles - ASSETS

Prepaid supplies

You purchased table napkins worth P2,000 to be used in

your barbecue operations
Drills on Account Titles - ASSETS

Prepaid supplies

You purchased table napkins worth P2,000 to be used in

your barbecue operations

The table napkins, while still unused, are assets recorded as prepaid
supplies. When used, they are recorded as supplies expense.
Drills on Account Titles - ASSETS

Prepaid rent

You are renting a space for your barbecue stand. The

lease contract required you to pay P10,000 rent in
advance
Drills on Account Titles - ASSETS

Prepaid rent

You are renting a space for your barbecue stand. The

lease contract required you to pay P10,000 rent in
advance

The rent paid in advance is an asset recorded as prepaid rent. This

amount will be charged as rent expense when incurred(i.e. used up)
Drills on Account Titles - ASSETS

Equipment

You purchase a barbeque grill worth P1,000

Drills on Account Titles - ASSETS

Equipment

You purchase a barbeque grill worth P1,000

The barbecue grill is an asset recorded as equipment

Notes:
The cost of equipment is expected to be used over more than one period
The cost of this asset is then allocated over the period it is expected to be used.
The portion of cost allocated to the current period is called depreciation expense
The total depreciation expenses recognized since the equipment was acquired is
piled up in the accumulated depreciation account.
Drills on Account Titles - ASSETS

Accumulated depreciation - Equipment

You expect to use the barbecue grill for 5 years

Drills on Account Titles - ASSETS

Accumulated depreciation - Equipment

You expect to use the barbecue grill for 5 years

The cost of the barbecue grill will be allocated over the 5-year period that you
will be using it. The amount allocated each year is called “depreciation expense”
The depreciation expense per year is P200 (P1,000 ÷ 5 years). Thus, after a year,
the accumulated depreciation of the equipment will be P200 (P200 x 1 yr.); after
two years, the accumulated depreciation will be P400 (P200 x 2 years); after 3
years, P600 (P200 x 3 years), etc.
In accounting, depreciation means an allocation of cost over the period where a
depreciable asset is used.
Drills on Account Titles - LIABILITIES

Accounts Payable

You run out of inventory of barbecue, so you went to

Mr. Porky’s Meat Shop to buy pork. You don’t have the
available cash, so you promised orally that you will be
paying the pork, worth P500, next week
Drills on Account Titles - LIABILITIES

Accounts Payable

You run out of inventory of barbecue, so you went to

Mr. Porky’s Meat Shop to buy pork. You don’t have the
available cash, so you promised orally that you will be
paying the pork, worth P500, next week

The P500 payable is a liability recorded under accounts payable.

Drills on Account Titles - LIABILITIES

Notes Payable

Remember your P1,200 loan from Mr. Bombay? Well,

he required you to write a promissory note to repay the
borrowed money at some future date.
Drills on Account Titles - LIABILITIES

Notes Payable

Remember your P1,200 loan from Mr. Bombay? Well,

he required you to write a promissory note to repay the
borrowed money at some future date.

The P1,200 payable is a liability recorded under notes payable.

Drills on Account Titles - LIABILITIES

Interest Payable

Your loan from Mr. Bombay requires repayment within

30 days plus 20% monthly interest (‘five-six’). At the
end of 30 days, you will be incurring interest expense of
P240 (1,200 note payable x 20% interest rate).
Drills on Account Titles - LIABILITIES

Interest Payable

Your loan from Mr. Bombay requires repayment within

30 days plus 20% monthly interest (‘five-six’). At the
end of 30 days, you will be incurring interest expense of
P240 (1,200 note payable x 20% interest rate).

Prior to paying the interest, the accrued interest is recorded as

interest payable.
Drills on Account Titles - LIABILITIES

Salaries Payable

By month-end, total salaries earned by an employee

during the month amounted to P8,000. However, the
employee has not yet claimed the salary.
Drills on Account Titles - LIABILITIES

Salaries Payable

By month-end, total salaries earned by an employee

during the month amounted to P8,000. However, the
employee has not yet claimed the salary.

The unpaid salary already earned by the employee is recorded

salaries payable.
Drills on Account Titles - LIABILITIES

Utilities Payable

Your electricity bill for the month of January amounted

to P2,000. The bill is not yet paid
Drills on Account Titles - LIABILITIES

Utilities Payable

Your electricity bill for the month of January amounted

to P2,000. The bill is not yet paid

The unpaid utility already used but not yet paid is recorded utilities
payable.
Drills on Account Titles - LIABILITIES

Unearned income

You received an order of barbecue worth P800. The

customer paid the sale price but instructed you to
deliver the barbecue next week.
Drills on Account Titles - LIABILITIES

Unearned income

You received an order of barbecue worth P800. The

customer paid the sale price but instructed you to
deliver the barbecue next week.

Right now, the sale price collected is not yet earned (i.e., unearned)
because the barbecue is not yet delivered. Thus, the cash collection is
initially recorded as liability (i.e., unearned income) and will be transferred
to income (i.e., sales) next week when the barbecue is delivered.
Drills on Account Titles – EQUITY

Owner’s capital

You invested P800 to your barbeque business.

Drills on Account Titles – EQUITY

Owner’s capital

You invested P800 to your barbeque business.

Your P800 investment is recorded in the Owner’s capital account.

Drills on Account Titles – EQUITY

Owner’s drawings

You made temporary withdrawals of P200 from your

barbecue business.
Drills on Account Titles – EQUITY

Owner’s drawings

You made temporary withdrawals of P200 from your

barbecue business.

Your P200 withdrawals are recorded in the Owner’s drawings

account.
Drills on Account Titles – INCOME

Sales

You sold barbecue worth P500

Drills on Account Titles – INCOME

Sales

You sold barbecue worth P500

The sale is recorded in the Sales account

For the rendering of services, as opposed to sale of goods, the

income account used is the Service fees account.
Drills on Account Titles – INCOME

Interest income

After a month, you will have earned the 1% monthly

interest on the loan you have extended to your friend
Drills on Account Titles – INCOME

Interest income

After a month, you will have earned the 1% month

interest on the loan you have extended to your friend

The interest earned is credited to the interest income account

Drills on Account Titles – EXPENSE

Cost of sales or Cost of goods sold

The cost of the barbecue that was sold for P500 is P300
Drills on Account Titles – EXPENSE

Cost of sales or Cost of goods sold

The cost of the barbecue that was sold for P500 is P300

The P300 cost is expensed as Cost of sales or Cost of goods sold

Drills on Account Titles – EXPENSE

Freight-out

Your business has a hotline. Customers can order

barbecue through phone call, text message, or Facebook
Messenger. No delivery charges. During the period, the
cost of gasoline for your motorcycle, attributable to
delivering barbecue to customers, amount to P100.
Drills on Account Titles – EXPENSE

Freight-out

Your business has a hotline. Customers can order

barbecue through phone call, text message, or Facebook
Messenger. No delivery charges. During the period, the
cost of gasoline for your motorcycle, attributable to
delivering barbecue to customers, amount to P100.

The delivery costs of P100 are recorded as freight-out

Drills on Account Titles – EXPENSE

Salaries expense

You hired a helper in your barbecue business. Your

employee earns compensation of P8,000 per month
Drills on Account Titles – EXPENSE

Salaries expense

You hired a helper in your barbecue business. Your

employee earns compensation of P8,000 per month

At the end of each month, you will record the P8,000 earned by the
employee as salaries expense.
Drills on Account Titles – EXPENSE

Rent expense

You are renting a space for your barbecue stand. The rent
is P5,000 per month
Drills on Account Titles – EXPENSE

Rent expense

You are renting a space for your barbecue stand. The rent
is P5,000 per month

At the end of each month, you will record the rent expense of
P5,000.
Drills on Account Titles – EXPENSE

Utilities expense

After a month of operations, your business received

electricity bill of P2,000 and water bill of P200.
Drills on Account Titles – EXPENSE

Utilities expense

After a month of operations, your business received

electricity bill of P2,000 and water bill of P200.

The electricity and water bills are recorded as utilities expense.

Drills on Account Titles – EXPENSE

Supplies expense

The cost of table napkins used during the period

amounted to P50.
Drills on Account Titles – EXPENSE

Supplies expense

The cost of table napkins used during the period

amounted to P50.

The cost of the supplies used is recorded as supplies expense.

Drills on Account Titles – EXPENSE

Bad Debt expense

Of your total accounts receivable of P500, you expect to

collect only about P480.
Drills on Account Titles – EXPENSE

Bad Debt expense

Of your total accounts receivable of P500, you expect to

collect only about P480.

The P20 uncollectible balance is recorded as bad debt expense.

Drills on Account Titles – EXPENSE

Depreciation expense

The P1,000 cost of the barbecue grill will be allocated over

the 5 years that you will be using it. The amount allocated
each year is called the “depreciation expense.” The
depreciation expense per year is P200 (P1,000 ÷ 5 years).
Drills on Account Titles – EXPENSE

Depreciation expense

The P1,000 cost of the barbecue grill will be allocated over

the 5 years that you will be using it. The amount allocated
each year is called the “depreciation expense.” The
depreciation expense per year is P200 (P1,000 ÷ 5 years).

At the end of the year, you will record the allocated cost of the
barbecue grill of P200 as bad debt expense.
Drills on Account Titles – EXPENSE

Advertising expense

You paid Justin Bieber P5,000 to endorse your barbecue

business.
Drills on Account Titles – EXPENSE

Advertising expense

You paid Justin Bieber P5,000 to endorse your barbecue

business.

The payment is recorded as advertising expense.

Drills on Account Titles – EXPENSE

Insurance expense

You have obtained a one-year, fire insurance for your

barbecue stand for P12,000.
Drills on Account Titles – EXPENSE

Insurance expense

You have obtained a one-year, fire insurance for your

barbecue stand for P12,000.

The used-up portion of the insurance is recorded as insurance

expense.
Drills on Account Titles – EXPENSE

Taxes and licenses expense

During the period, you paid local taxes amounting to P500

Drills on Account Titles – EXPENSE

Taxes and licenses expense

During the period, you paid local taxes amounting to P500

The local taxes paid are recorded as taxes and licenses.

Drills on Account Titles – EXPENSE

Interest expense

(Refer to “Notes payable” and “interest payable” in

previous illustration)
Drills on Account Titles – EXPENSE

Interest expense

(Refer to “Notes payable” and “interest payable” in

previous illustration)

At the end of the month, you will record P240 as interest expense.
Drills on Account Titles – EXPENSE

Loss

Your barbecue grill is stolen.

Drills on Account Titles – EXPENSE

Loss

Your barbecue grill is stolen.

The carrying amount of the stolen barbecue grill is charged as a loss.

The carrying amount is computed as “Acquisition cost minus
Accumulated depreciation.” The cost of the barbecue grill is P1,000.
If the accumulated depreciation is P400, the carrying amount is P600
(1,000 – 400).
 The Accounting Elements

Assets BS PERMANENT
OR
Liabilities or
SFP REAL ACCOUNTS
Capital
Revenue IS TEMPORARY
or OR
Expenses SCI NOMINAL ACCOUNTS