Fundamentals of Accountancy, Business and Management 1

Quarter 3

LESSON 4 TYPES OF MAJOR ACCOUNT

Content Standards:
the five major accounts,
namely,
1. assets
2. liabilities
3. capital
4. Income (revenue)
5. expenses
Performance Standards:
define, identify, and classify accounts according to the five major types.

Most Essential Learning Competencies:

1. discuss the five major accounts ABM_FABM11- IIId-e-19
2. prepare a Chart of Accounts ABM_FABM11- IIId-e-21

TYPES OF MAJOR ACCOUNT

Let us first know the definitions of the five (5) major accounts:
1. Assets are the resources owned and controlled by the firm or the company.
Examples of these are cash, computer systems and patents.

2. Liabilities are the obligations of the company arising from past events which are to be settled
in the future. These represent what the company owes to other people, organization, and
financial institutions.
Examples of these are mortgages, vehicles and loans.

3. Equity or Owner’s Equity is the owner’s claims in the business. It is part of the total assets
that the owners of the company fully own. An example of this is capital.

4. Revenue or Income is the money that the company earns from its regular sales of products or
services. This is earned by the company through sales of products or services.
Examples of this are sale of building materials and accounting services by a CPA firm.

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5. Expenses are the money that the company spends to produce the goods or services it sells.
Examples of these are rent expense, supplies expense and salaries expense.

ASSETS
Assets There are the two (2) classifications of assets:
1. Current Assets
2. Non- Current Assets

Difference between Current vs. Non-Current Assets & Tangible vs. Intangible Assets

• Current Assets are assets that can be collected, sold, and even used up to one year after year-
end date.
Examples of Current Assets are:

• Cash is money on hand, or in banks, and other items considered as a medium of

exchange in business transactions.
• Accounts Receivable are amounts due from customers arising from debts.
• Notes Receivable are amounts due from clients supported by a written note or promise.
• Inventories are assets held for resale in the course of the business.
• Supplies are items purchased by an enterprise that is unused as of the reporting date.
• Prepaid Expenses are advance payment for expenses.
• Accrued Income is an income or revenue earned by the firm but not yet collected.
• Short-term Investments are the investments made by the company that is intended to be
sold immediately.

• Non-current Assets are assets that cannot be collected, sold, and even used.
up to one year after year-end date.

Examples of Non-Current Assets

• Property, Plant, and Equipment are long-lived assets that have been acquired for use
in operations.
• Long term Investments are the investments of the firm made for long term purposes.
• Tangible Assets are physical assets in the form of cash, furniture and fixtures, and
supplies.
• Intangible Assets are non-physical assets in the form of trademarks and patterns.

LIABILITIES

Current vs. Non-Current Liabilities

Current Liabilities are those that reach its due date for payment (paid, recognized
as revenue) within one year after year-end date.

Examples of Current Liabilities

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 • Accounts Payable are amounts due or debts to the suppliers for goods purchased or for
services received on account.
• Notes Payable are amounts due to third parties supported by a written note or promise.
• Accrued Expenses are treated as liabilities since these are the expenses that are incurred
but not yet paid (e.g. salaries payable, taxes payable).
• Unearned Income is cash or payment collected in advance.

Non-current Liabilities are those that do not reach its due date for payment, (paid,
recognized as revenue) within one year after year-end date.

Examples of Non-Current Liabilities

• Loans Payable is a contract wherein the owner of the property gives the right to use it to
another party in exchange for an interest payment and gives back the property at the end of
their contract. It is documented by promissory note. And in the case there is still a portion
which is unpaid as of the date of a company's balance sheet, the remaining balance on the
loan is called a loan payable.

• Mortgage Payable is the liability of a property owner to pay a loan that is secured by
property and from the borrower’s point of view. The mortgage is considered as long-term
liability. Some part of the debt that is payable within the next 12 months is classified as a
short-term liability. The remaining unpaid principal will be the total amount due of the
loan.

OWNER’S EQUITY

There are two (2) important elements that comprised the equity:

• Capital is the worth of cash and other assets invested in the business.
• Drawing is an account debited for assets withdrawn by the owner for personal use from
the business.

Income - is the increase in resources resulting from the performance of service or selling of
goods.

Examples of income accounts are:

•Service revenue for service entities

•Sales for merchandising and manufacturing companies
•Interest Income

Expense -is the decrease in resources resulting from the operations of the business.

Examples of expense accounts are:

•Salaries expense

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•Interest expense
•Utilities expense

After the discussion on the Five Major Accounts, let us now proceed on the chart of accounts
starting from its definition.

A chart of accounts is a listing of all accounts used by companies in their financial records.
Here are the five steps in preparing a basic chart of accounts:

1. Make two columns.

2. Prepare the assets, liabilities, equity, revenue, and expenses, respectively.
3. List all assets, liabilities, equity, revenue, and expenses account in the first column.
4. In the second column, choose an account code (this may vary depending on the
company).
5. In the third column, write the description of each account title.

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ACTIVITY 1

Directions: Classify each account according to its category. Put a check (✓) on the right
column where each item belongs. Write your answers on a separate sheet of paper.

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ACTIVITY 2

Directions: Identify what is described on each number. Find the answer from the
box below. Write your answers on a separate sheet of paper.

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ACTIVITY 3

Directions: Choose the letter of the correct answer. Write your answers on a separate
sheet of paper