Chapter 4: Types of Major Accounts - FAR

Account

Basic storage of information in accounting

T-Account

It resembles the letter “T”

Account Title

Debit Side

Credit Side

T account has three parts:

Account Title

Describes the specific item of asset, liability, equity, income or expense

Debit Side

The left side of the account

Credit Side

The right side of the account

Elements of the financial statements

The items in the expanded accounting equation discussed in the previous chapter

Assets

Liabilities

Equity

Income

Expenses

Five major accounts:

Assets

Economic resources you control that have resulted from past events and can provide you with future economic benefits

Liabilities

Your present obligations that have resulted from past events and can require you to give up resources when settling them

Equity

Assets minus liabilities

Income

Increases in economic benefits during the period in the form of increase in assets, or decreases in liabilities, that result in increases in equity, excluding those relating to investments by the business owner

Revenue

Gains

Income includes?

Revenue

Arises in the course of the ordinary activities of a business

Gains

Represent other items that meet the definition of income and may or may not arise in the course of the ordinary activities of an entity

Expenses

Decreases in economic benefits during period in the form of decreases in assets, or increases liabilities, that result in decreases in equity, excluding those relating to distributions to the business owner

Expenses

Loses

Expenses include?

Expenses

Arise in the course of the ordinary activities of a business

Losses

Represent other items that meet the definition of expenses and may or may not arise in the course of the ordinary activities of the entity

Assets

Liabilities

Equity

Balance Sheet accounts:

Income

Expenses

Income statement accounts:

Balance sheet or statement of financial position

One of the components of a complete set of financial statements

Income statement or statement of profit or loss

Sub-component of the statement of profit or loss and comprehensive income, which is also one of the components of a complete set of financial statements

Chart of accounts

List of all the accounts used by a business

Cash

Accounts receivable

Allowance for bad debts

Notes receivable

Inventory

Prepaid supplies

Prepaid rent

Prepaid insurance

Land

Building

Accumulated depreciation - building

Equipment

Accumulated depreciation - equipment

Balance sheet account: Asset

Accounts payable

Notes payable

Interest payable

Salaries payable

Utilities payable

Unearned income

Balance sheet account: Liabilities

Owner’s capital or Owner’s equity

Owner’s drawings

Balance sheet account: Equity

Service fees

Sales

Interest income

Gains

Income statement account: Income

Cost of sales or cost of goods sold

Freight-out

Salaries expense

Rent expense

Utilities expense

Supplies expense

Bad debt expense

Depreciation expense

Advertising expense

Insurance expense

Taxes and licenses

Transportation and travel expense

Interest expense

Miscellaneous expense

Losses

Income statement account: Expenses

Cash

Includes money or its equivalent that is readily available for unrestricted use (cash in hand and cash in bank)

Accounts receivable

Receivables supported by oral or informal promises to pay

Allowance for bad debts

The aggregate amount of estimated losses from uncollectible accounts receivable

Allowance for doubtful accounts

Another term of allowance for bad debts

Notes receivable

Receivables supported by written or formal promises to pay in the form of promissory notes

Inventory

Represents the goods that are held for sale by a business

Prepaid supplies

Represents the cost of unused office and other supplies

Prepaid rent

Rent paid in advance

Prepaid insurance

Cost of insurance paid in advance

Land

The lot on which the building of the business has been constructed or a vacant lot which is to be used as future plant site and it is not depreciable

Building

The structure owned by a business for use in its operations

Accumulated Depreciation - building

The total amount of depreciation expenses recognized since the building was acquired and made available for use

Equipment

Consists of various assets such as machineries, transportation equipment, office equipment, computer equipment, and furniture and fixtures

Accumulated depreciation - equipment

The total amount of depreciation expenses recognized since the equipment was acquired and made available for use

Accounts payable

Obligations supported by oral or informal promises to pay by the debtor

Notes payable

Obligations supported by written or formal promises to pay by the debtor in the form of promissory notes

Interest payable

Interest incurred but not yet paid. It arises from interest-bearing liabilities

Salaries payable

Salaries already earned by employees but not yet paid by the business

Utilities payable

Utilities already used but not yet paid

Unearned income

Items related to income that were collected in advance before they are earned

Owner’s capital or Owner’s equity

The residual amount after deducting liabilities from assets

Owner’s drawings

This account is used to record the temporary withdrawals of the owner during the period

Service fees

Revenues earned from rendering services

Sales

Revenues earned from the sale of goods

Interest income

Revenues earned from the issuance of interest-bearing receivables

Gains

Income earned from the sale of assets or from enhancements of assets or decreases in liabilities that are not classified as revenue

Cost of sales or cost of goods sold

Represents the value of inventories that have been sold during the accounting period

Freight-out

Represents the sellers’ costs of delivering goods to customers. Other terms are delivery expense, transportation out, and carrying outwards

Salaries expense

Represents the salaries earned by employees for the services they have rendered during the accounting period

Rent expense

Represents the rentals that have been used up during the accounting period

Utilities expense

Represents the cost of utilities that have been used during the accounting period

Supplies expense

Represents the cost of supplies that have been used during the period

Bad debt expense

The amount of estimated losses from uncollectible accounts receivable during the period

Doubtful accounts expense

Other term of bad debt expense

Depreciation expense

The portion of the cost of a depreciable asset that has been allocated to the current accounting period

Advertising expense

Represents the cost of promotional or marketing activities during the period

Insurance expense

Represents the cost of insurance pertaining to the current accounting period

Taxes and licenses

Represents the cost of business and local taxes required by the government for the conduct of business

Transportation and travel expense

Represent the necessary and ordinary cost of employees getting from one workplace to another which are reimbursable by the business

Interest expense

Represents the cost of borrowing money. It is the price that a lender charges a borrower for the use of the lender’s money

Finance costs

Borrowing costs

Other terms of interest expense

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 business activities