FUNDAMENTALS OF ACCOUNTANCY, BUSINESS

AND MANAGEMENT 1
TOPIC 8:
TYPES OF MAJOR ACCOUNTS

Objectives:
 Discuss the five major accounts
 Cite examples of each type of account; and
 Prepare a chart of accounts
REVIEW:
Accounts are the components of the five major
Accounting Equation: Assets = Liabilities + Equity accounts in Accounting.

Assets are resources owned and controlled by the company that Assets : (Major Accounts)
can generate future benefits. Common Accounts are Cash, Accounts
Receivable, Inventories, PPE, Non-current
Liabilities are debt owed by the company to other entities like assets, and Intangible assets.
banks, companies and others.
Liabilities: (Major Accounts)
Equity is the residual interest or claims of the owners of the Common Accounts: Accounts Payable,
company. Unearned Income, Bank Loan payable

But its hard to record the business transactions using the Equity: (Major Accounts)
Accounting equation. That is why we should use a device to Common Accounts: Owner’s Capital,
record changes in accounting equation called Accounts. - Under Equity:
- Income (major accounts)
- Expenses (major accounts
 TYPES OF MAJOR ACCOUNTS:

1) ASSETS
1) Current Assets 4) INCOME (increases of Equity)
2) Non-current Assets 1) Service Revenue
2) Sales/Sales Revenue

2) LIABILITIES
1) Current Liabilities 5) EXPENSES (decreases of Equity)
2) Non-current Liabilities 1) Cost of Goods Sold
2) Administrative expenses
1) Salaries and wages
2) Utilities expenses
3)EQUITY/ONWER’S CAPITAL/STOCKHOLDERS’
EQUITY
1) Sole Proprietorship = Owner’s Capital
2) Partnership= Partners Capital/Owner’s Capital
3) Corporation= Stockholders’ Equity/Shareholders Equity
 MAJOR ACCOUNTS:
1) ASSETS

Assets are resources that a company owns in order to

derive some future benefits.

These assets are used by the company in its normal operations

such as the manufacture of goods or delivery of services. These
benefits are usually in the form of their ability to directly or
indirectly increase the inflow of cash to the company or
reduction of its outflows.

Characteristics:
-Tangible
-Intangible
-Living
-Moving
ASSETS:
A) CURRENT ASSETS
CURRENT ASSETS are all assets which are expected to be realized within the ordinary course of business, or a
span of 12 months, whichever is longer.

Realization means that these assets are expected to be converted into cash, sold, or disposed after certain time or
through the passage of time.

1) CASH- the most basic, familiar and most liquid of all assets. It does not only include money but also in the
form of bank deposits in checking accounts and savings accounts. Other companies would include Cash
Equivalents.
• Money means everything composed of bills, coins, considered as legal tender (Philippine Peso in the
Phils.) or legal tender of other nations like US Dollar.
• Cash on hand includes petty cash, undeposited cash, revolving funds and others.
• Bank deposits includes checking, current, and savings accounts.
• Checks provided by the customer for the services rendered.
• Cash equivalents are short-term investments which are considered subject to negligible changes in fair
value and are maturing within three months from the date of their purchase.
 CURRENT ASSETS:
2) Accounts Receivables are oral promises to the entity to receive cash at a later data.
These are amounts due from customers arising from credit sales or credit services in a
normal course of business.
Some companies would call this as Accrued Income which is already earned but not yet
collected.

 Trade Receivables- arise from the normal course of business

 Non-Trade Receivables or Other Receivables- arise out side of normal operations of
the business.
 Notes Receivables- these are amounts due from clients supported by promissory
notes. These are more formal than accounts receivable. This added formality feature
ensures that, in the case of a default by the borrower, the company can seek
additional legal remedies to recover what has been lent. In addition, by its written
nature, notes receivable tend to have longer maturity dates than accounts receivable,
but still are generally considered as within the operating cycle. Notes receivable are
also sometimes called PROMISORY NOTES.
 CURRENT ASSETS:
3) Inventories , are any items and property which:
• Held for sale in ordinary course of business
• In the process of production for such sale (WIP)
• In the form of materials or supplies to be consumed in the production process or in the rendering of services.

Manufacturing type of business:

 Raw Materials are basically inputs for producing other materials.
 Once they are entered into production, but awaiting completion, they are called “Work-in-process items”.
Meanwhile, there are items which do not actually serve as an input for a product but are nevertheless under
during production called “Supplies”.
 Finished goods are the end products upon completing the production.
TYPES OF INVENTORIES
 CURRENT ASSETS:
4) Supplies are items purchased by an enterprise which are unused as of the reporting date.

5) Short-term investments are the investments made by the company that are
Intended to be sold immediately. These investments are in low-risk, highly
Liquid assets such as bonds and stocks which are expected to be liquidated
In less than a year. Most often, short-term investments are entered into by the
Company to make the most income out of its idle cash. This income is earned
Through interests, dividends, and price appreciations, usually exceeding income
Earned from interest on bank savings deposits.
 CURRENT ASSETS:
6) Prepayments or prepaid expenses are expenses paid in advance. They are assets and become expenses through
the passage of time. They are simply paid in advance for goods or services anticipated to be received by the entity
in the future.

Ex. Rental deposit, advance rent, prepaid load, insurance

This is subject to adjustment every end of accounting period for proper matching of expenses.
ASSETS:
B) NON-CURRENT ASSETS
NON- CURRENT ASSETS are all others assets which are not current basically fall into the definition of non-current
assets. Take note that they do not need to have at least 12 months remaining before their expected realizations: as long
as they do not meet the current asset classifications.

1) INVESTMENTS are company’s investments which it does not expect to realize within 1 year or for long-term
purposes. For example real estate, long-term notes, government treasury bills, and funds set aside for long-term
purposes.
2) FIXED ASSETS are the most tangible, longest-serving assets a company can have. They are expected to not be
converted into cash immediately, and are regularly places as means of productions. Collectively, they can be called
Property, Plant and Equipment (PPE).

Ex. Land, Land improvements, buildings, machineries, equipment, and furniture and fixtures.

Fixed assets are not usually consumable and are only used through utilization. Fixed assets, with the exception of land,
also gradually deteriorate with the passage of time, through usage, normal wear-and-tear, and obsolescence. Such
deterioration is more properly termed as ”DEPRECIATION”, a form of expense.
ASSETS:
B) NON-CURRENT ASSETS
3) INTANGIBLE ASSETS are assets without a physical substance and yet are similarly realizable over long periods
of time.

Ex. Patents, copyrights, franchises, goodwill, trademarks, and licenses.

Often, they are simply represented by written documents or certificates stating their description and ownership status.
Despite no physical substance of Intangible assets, they can still provide measurable economic benefits to the entity
which controls them. Overtime, the valued of intangible assets decrease, hence subject to what we called
“AMORTIZATION”, a form of expense.

4) OTHER ASSETS
All remaining items which do not fall into any of the accounts mentions are classified together as “OTHER ASSETS”.
This account serves as a catch-all for assets which are usually very much unique or hard to classify.
 MAJOR ACCOUNTS:
2) LIABILITIES

Liabilities are debts and obligations of the company to

other entity.

 Current liabilities
 Non-current Liabilities
LIABILITIES

Current Liabilities are obligations by the company which are expected to be settled or paid out by the entity within
12 months. Or other definitions stating that, current liabilities are liabilities that fall due within one year after year-
end date.

1) ACCOUNTS PAYABLES- is the opposite of accounts receivable. These are amounts due or payable to suppliers
for goods purchased on account or services received on account. Accounts payable is particularly helpful in an
entity’s cash management as it can help the entity lessen the pressure of a cash outflow by deferring cash payment
dates. However, it can forego discounts which can be availed only when paying in cash.

2) NOTES PAYABLE- are written promises of the entity to pay a sum certain in a future determinable time. This is
supported by a promissory notes. This usually arise from larger trade or business transactions which additional
formality is necessary. But they can also arise from regular borrowings of entity like for instance, bank loans.

Notes Payable pay interest regularly, either implied through discount or through fixed periodic payments stated in the
written agreement. Upon maturity, the entity has to pay the full amount of the principal plus the accrued interest
owing until the maturity date. It can be paid lump sum or installments depending upon the agreement.
 LIABILITIES
3) ACCRUED LIABILITIES/EXPENSES- are all other accounts which the company should pay, arising form the
normal course of business. Throughout the operating cycle, it is very much possible that the company has already
received benefits from certain events yet has still been unable to pay for it. Ex. Water and electricity bills are paid in
the due dates but the entity already enjoyed the benefit of it during the operation of the business. When bills are
received before reporting date, but paid after the reporting date it is recorded as accrued liabilities/expenses.

Accrued liabilities are considered as opposite of prepaid assets.

UNEARNED INCOME OR REVENUE is a form of accrued liabilities related to goods or services that the entity has
yet to deliver, but has already received payment from a customer.

4) OTHER PAYABLES- this includes those which are due from the entity outside the normal course of its business.
These includes dividend payable, interest payable, payables arising from lawsuits. As long as they are payable within
the year but do not enter into the other previous current classifications, they can be included in this catch-all
classification.
 LIABILITIES
5) CURRENT PORTION OF LONG_TERM DEBTS-
As the name suggests, these are long-term debts payable within the coming year. Some long-term debts, due to their
large principals, usually have features that allow the borrower to pay on an installment basis, so as to ease them the
burden of a heavy cash outflow from a single maturity date. The current portion of such debts is considered, for our
purposes, a current liability, notwithstanding the fact that the remaining debt may be due many years from now.

Example: Company A borrowed P500,000 payable of 5 years to a bank with 10% per annum interest last Jan 1, 2023.

Current portion: Long-term loan payable:

Principal : P100,000. (P500,000 /5 years) Principal: P400,000 (P5000,00/5 years x 4
years remaining)
Interest: 50,000. (P500,000 x 10%)
Total. P 150,000
As of Dec. 31, 2023
 LIABILITIES
Non-Current Liabilities are liabilities which the entity expects to settle after more than a year, or have the legal or
contractual capacity to defer payment accordingly. OR liabilities that do not fall due within one year after year-end
date.

1) BONDS PAYABLE- are form of long-term debt, often in huge sums, contained in agreement called as the bond
indenture. Bonds have stated interest rate, which may differ form prevailing market interest rate, causing the
fair values to change from time to time.
Term bonds- are bonds have principal that mature in a single date
Serial bonds- are bonds that mature in multiple dates.
2) MORTGAGE PAYABLE- is a liability of the entity of which the proceeds are used to purchased land or other
non-current assets for business operations using the property of the company as the collateral.
3) LOANS PAYABLES- is a long-term obligation of an entity to banks or financial intermediaries for the loans
committed to pay in a future date. This usually in a 3 to 5 year term. It may be secured and unsecured of a
collateral.
 MAJOR ACCOUNTS
3) EQUITY
Equity is the residual interest of the owners in the assets of the business after considering all liabilities. It is equal to
total assets minus total liabilities.

Sole proprietorship – equity is called Owner’s Capital or Capital

Partnership- equity is called Owner’s Capital or Partner’s Capital
Corporation- equity is called Stockholders’ Equity or Shareholders’ Equity

Capital- is the initial investment either in cash or other assets invested by the owners in the business.
Drawings- is the account debited for the assets withdrawn by the owner for personal use from the business.

Stockholders’ Equity:
1) Common Stock- is a security which represents ownership in a corporation. Those who owns common stock of a
corporation are called common stockholders. A common stockholders has many rights like right to vote, right to
receive dividends, and pre-emptive right which is the right to be offered first to buy additional shares in the event of
future issuance.
MAJOR ACCOUNTS
3) EQUITY
Stockholders’ Equity:
Common Stock
All common stock comes with a par value. This is the legal nominal value assigned to it, and it is illegal for it to be
issued for less than this price. In the balance sheet, the common stock account represents the number of common shares
issued and outstanding multiplied by the stock’s par or stated value.

2) PREFERRED STOCK-is a security which represents ownership in a corporation and owner’s of preferred stock are
called PREFERRED STOCKHOLDERS. This represents the number of preferred shares issued and outstanding
multiplied by the stock’s par value. The difference between preferred and common stock is the preferred stock’s
preference as to the corporate dividends and/or liquidation.

Corporations sometimes buy their own stocks. This can be for many reasons like preventing a corporate take-over or
increasing the stock price. It has the effect of lowering the number of shares outstanding. The shares that were bought
are called Treasury shares. They have the effect of decreasing total shareholders’ equity.
MAJOR ACCOUNTS
3) EQUITY
Stockholders’ Equity:
3) ADDITIONAL PAID-IN CAPITAL-is also called Share Premium. This the excess over par-value contributed by the
company’s shareholders in a stock issue. It can either be from the issuance of common shares or preferred shares.
Additional paid-in capital arises because the selling value of a stock is almost always greater than its par value. In other
words, the par value is the minimum amount a share can be issued for.

4) RETAINED EARNINGS- represents the accumulated net income from operations over several periods. It is a
measure of how much the company earned since day one of the its operations. When the corporation gives back to its
shareholders because it has been successfully operating over several period, it declares dividends which would reduce
retained earnings.
MAJOR ACCOUNTS
4) INCOME/REVENUE (INCREASES IN EQUITY)
REVENUE/INCOME –are the amounts received by a business earned as a result of selling something or rendering a
service. It is the increase in equity as a result of day-to-day operations. It increases the resources of the company from
performance of services or selling of goods.

Note that the amount of revenues for a period does not necessarily equate to the amount of actual cash received in that
period of time. Revenues are only recognized when incurred and when an entity already in incurs the related expenses.

DEFERRED REVENUE/UNEARNED INCOME- these are the common accounts used. But the only meaning is that,
the company received cash in the services or products to be delivered or rendered yet. (under liability portion in the
balance sheet)

REVENUES can be:

 Operating Revenue- revenues that originated from main business operations (ex. Sales, service revenue, etc.)
 Non-operating revenue- revenues that do not originate from main business operations and are a result of some side
activities (ex. Interest revenue, rent revenue of a business not engaged in the renting industry)
 EXAMPLES OF REVENUES
1) Sales Revenue- main source of revenue for businesses that sell products (ex. Supermarkets, stores, food)
2) Service Revenue- main source of revenue for businesses that render services (ex. Barber shops, accounting
services, legal services, medical services)
3) Interest Revenue- revenue earned as result of investment in debt securities or receivables from other companies.
4) Dividend Revenue- revenues earned as a result of dividend declaration of a company where in a business has
invested stocks.
5) Contributions Revenue- revenue earned by not-to-profit organizations usually in the form of donations by outside
parties.

Other Increases in Equity

 Gains- are increases in equity as a result of non-recurring activities or the increase in value of investments. Non-
recurring activities include the sale of company’s non-current assets like fixed assets.
 Capital contributions- are increases in equity as a result of transactions with owners. It can be a form of cash and
non-cash assets given by the owners for use in business.
MAJOR ACCOUNTS
5) EXPENSES (DECREASES IN EQUITY)
EXPENSES- are the amounts consumed by the business to operate. They are the result of attempting to generate
revenues. Equity decreases as result of expenses, losses, and distributions to owners. They are the result of day-to-
day operations and do not always equal the amount of cash used up in a given period.
Examples of expenses:
1) Cost of goods sold- when inventory is sold, the cost of goods sold reflects what the company incurred to make
the inventory sell (manufacturing) or to buy them (merchandising)
2) Utility expense-includes water, electricity
3) Depreciation expense- a result of using building and equipment
4) Office supplies expense- a result of using up office supplies
5) Insurance expense- a result of insurance paid for, expiring over time
6) Salaries expense- a result of recognizing salaries of employees
7) Bad debts expense- an estimate of ho much accounts receivable the company will not be able to collect.
8) Interest expense- interest incurred as a result of borrowing money
Other decreases of equity
 Losses- are decreases in equity of non-recurring activities or decreases in value of assets.
 Distributions to owners- are assets given to owners, usually in cash. For corporations, they are called dividends.
NET INCOME
Net income- the excess of revenue over expenses and losses. They are also called NET EARNINGS.

Chart of Accounts
It is a listing of all accounts used by a company in its operations. The chart of accounts is classified according to the five
major accounts. It includes reference numbers so they can be traced to the ledger. It helps to identify where the money is
coming from and where it is going. The chart of account is the foundation of the financial statements.
ACTIVITY 6