Module 4: Lesson 1 - Types of Major Accounts

Lecture
5 TYPES OF MAJOR ACCOUNT

1. Assets are the resources owned and controlled by the firm.

2. Liabilities are obligations of the firm arising from past events which are to be settled in
the future. Amount owes to creditors.
3. Equity or Owner’s Equity are the owner’s claims in the business. It is the
residual interest in the assets of the enterprise after deducting all its liabilities.
4. Income is the increase in economic benefits during the accounting period in the form of
inflows of cash or other assets or decreases of liabilities that result in increase in equity.
Income includes revenue and gains.
5. Expenses are decreases in economic benefits during the accounting period in the form
of outflows of assets or incidences of liabilities that result in decreases in equity.
TYPICAL ACCOUNT TITLES USED

Statement of Financial Position / Balance Sheet Accounts

ASSETS
Current Assets

Current assets are assets that can be realized (collected, sold, used up) one year after
year-end date.

1. Cash is money on hand, or in banks, and other items considered as medium of exchange
in business transactions. It is considered as the most liquid assets.
2. Accounts Receivable are amounts due from customers arising from credit sales or credit
services.
3. Notes Receivable are amounts due from clients supported by promissory notes.
4. Inventories are assets held for resale.
5. Supplies are items purchased by an enterprise which are unused as of the reporting date.
6. Prepaid Expenses / Prepayments are expenses paid in advance. They are assets at the
time of payment and become expenses through the passage of time. These include
prepaid insurance and prepaid rent.
7. Accrued Income is revenue earned but not yet collected.
8. Short term investments are the investments made by the company that are intended to
be sold immediately.

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Non-current Assets

Non-current Assets are assets that cannot be realized (collected, sold, used up) one
year after year-end date.

1. Property, Plant and Equipment / Fixed Assets are long-lived assets which have been
acquired for use in operations. Example, equipment, land, building, vehicle, furniture,
fixtures, etc.
2. Accumulated Depreciation 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 building – to obtain book value.
3. Long term Investments are the investments made by the company for long-term
purposes. Examples includes real estate, long-term notes, government treasury bills, etc.
4. Intangible Assets are assets without a physical substance. Examples include franchise
and copyright.
• Tangible Assets are physical assets such as cash, supplies, and furniture and
fixtures.
• Intangible Assets are non-physical assets such as patents and trademarks

LIABILITIES

Current Liabilities

Current liabilities are liabilities that fall due (paid, recognized as revenue) within
one year after year-end date.

1. Accounts Payable are amounts due, or payable to, suppliers for goods purchased on
account or for services received on account.
2. Notes Payable are amounts due to third parties supported by promissory notes.
3. Accrued Expenses are expenses that are incurred but not yet paid. Examples includes
salaries payable, taxes payable, utilities payable, and interest payable.
4. Unearned Revenue / Income / Customer Deposits is cash collected in advance; the
liability is the services to be performed or goods to be delivered in the future.

Non-Current Liabilities

Non-current liabilities are liabilities that do not fall due (paid, recognized as
revenue) within one year after year-end date.

1. Mortgage Payable records long-term debt of the business entity for which the business
entity has pledged certain assets as security to the creditor.

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 2. Bond Payable. Business organization 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 bonds is a contract between the issuer and the lender
specifying the terms of repayment and the interest charged.

OWNER’S EQUITY

1. Capital is the value of cash and other assets invested in the business by the owner of the
business. It is also increased by the amount of profit earned during the year or is
decreased by a loss. Example, Dela Cruz, Capital; Santos, Capital.

2. Withdrawals / Drawing is an account debited for assets withdrawn by the owner for
personal use from the business. Example, Dela Cruz, Withdrawal; Santos, Withdrawal.

3. Income Summary is a temporary account used at the end of the accounting period to
close income and expenses. This account shows the profit or loss for the period before
closing to the capital account.

Income Statement Accounts

INCOME
1. Service Income / Service Revenue / Service Fees. Revenues earned by performing
services for a customer or client. Example, accounting services by a CPA firm, laundry
services by a laundry shop.

2. Sales. Revenues earned as a result of a sale of merchandise. Example, sale of building

materials by a construction supplies firm.

EXPENSES

1. 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.

2. 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.

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 3. Utilities Expense / Telecommunication, Electricity, Fuel and Water Expenses.
Expenses related to use of telecommunications facilities, consumption of electricity, fuel
and water.

4. Rent Expense. Expense for space, equipment or other asset rentals.

5. Supplies Expense. Expense of using supplies (example: office supplies) in the conduct
of daily business.

6. Insurance Expense. Portion of premiums paid on insurance coverage (example: on

motor vehicle, health, life, fire, typhoon or flood) which has expired.

7. Depreciation Expense. The portion of the cost of a tangible asset (example: buildings
and equipment) allocated or charged as expense during an accounting period.

8. Uncollectible Accounts Expense / Bad Debt Expense. The amount of receivable

estimated to be doubtful of collection and charged as expense during an accounting
period.

9. Interest Expense. An expense related to use of borrowed funds.

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