104 ee era ee | Chapter 4 | Types of Major Accounts Learning Objectives 1. State the five major accounts. 2._Give examples of each major type of account, The Account Account is the basic storage of information in accounting, It is ; record of the increases and decreases in a specific-item of ase liability, equity, income or expense. : An account may be depicted through a “T-account.” 4°. account” is called as such because it resembles the letter “T:" 4 “T-account” has three parts, namely: 1. Account title — describes the specific item of asset, liability, equity, income or expense. 2. Debit side — the left side of the account. 3. Credit side - the right side of the account. This is the “account title. Cash <> Debit | Credit Tan 500 3Jan 1,000 Balance 700 The term “credit” (Cr)' simply refers to the right side of the account Itis sometimes referred 1025 the “value parted with _ 800 4Jan. The term “debit” (Dr.) ' simply refers to the left side of the account. itis sometimes referred to as the “value received.” The difference between the total debits a Credits in the account represents the i ; of the account (500 + 1,000 — 800 = 70 int If total debits exceed total credits, the aco! has a debit balance. If total credits es total debits, the account has a credit bala! and ' These terms and their abbreviations come from the Latin words debere (0") credere (Cr.).Types of Major Accounts 105 _Types of Major On The Five Major Accounts The five major accounts, also called the elements of the financial statements, are actually the items in the expanded accounting equation discussed in the previous chapter. Let us recall these items. 1, ASSETS - are the economic resources you control that have resulted from past events and can provide you with future economic benefits. 2. LIABILITIES - are your present obligations that have resulted from past events and can require you to give up resources when settling them. 3. EQUITY — is assets minus liabilities. 4. INCOME - is increases in economic benefits during the period in the form of increases in assets, or decreases in liabilities, that result in increases in equity, excluding those relating to investments by the business owner. Income includes both revenue and gains. a. Revenue arises in the course of the ordinary activities of a business, e.g., sales and service fees. b. 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. Example 1: Your business sells barbecue. The income you derive from selling barbecue is called revenue (i.e., sales revenue) because selling barbecue is your main. business (ordinary business activity), 5 One day, you decided to replace your old beach umbrella. The umbrella has a carrying amount of 2,000 in your books of accounts. You were able to sell the old umbrellaPe ioe eee rence between the selling price : ount of 2,000, represents gain 2, This is because selling of umbreli,. dinary business activity) isn, for P2,200. The diffe and the carrying am 2,000 = P200 gain). your main business (not your or *Carrying amount refers to the net amount at which an item ig - (ie, recorded) in the books of accounts. nt EXPENSES - are decreases in economic benefits during i, 5. period in the form of decreases in assets, or increases ;, liabilities, that result in decreases in equity, excluding tho, relating to distributions to the business owner. Expenses include both expenses and losses. a. Expenses arise in the course of the ordinary activities of; business. b. Losses represent other items that meet the definition ¢ expenses and may or may not arise in the course of tt ordinary activities of the entity. Example 2: In your barbeque business (see Example 1 above), the cost ~ the barbecue you have sold is an expense. If you were able to sell the old umbrella with carryitt amount of P2,000 for only P'1,600, the difference now of Pall represents a loss (P1,600 - 2,000 = 400 loss). | 2 Notes: ee ce a apa | : seling Price is greater than carrying amount, the difference "| |_&_Hfselling price is less than carrying amount, the difference is aTypes of Major Accounts cf Classification of the Five Major Accounts The five major accounts are classified according to the financial statement where they appear as follows: [— BALANCE SHEET INCOME STATEMENT ACCOUNTS ACCOUNTS 1,_ASSETS 1._ INCOME 2, LIABILITIES 2. EXPENSES 3, EQUITY > The balance sheet (or the statement of financial position) is one of the components of a complete set of financial statements. The balance sheet shows the financial position of a business. > The income statement (or the statement of profit or loss) is a sub- component of the statement of comprehensive income, which is also one of the components of a complete set of financial statements. The income statement shows the profit or loss of a business. The financial statements are discussed in detail in Intermediate Accounting 3. Chart of Accounts A chart of accounts is a list of all the accounts used by a business. The following is an example of a basic chart of accounts:108 J Q, TS ge pe ee ey Chart of Accounts INCOME STATEMER Perea SHEET ACCOUNTS eve ACCOUNTS No. No ASSETS INCOME 110 = Cash 410 — Service fees 120 Accounts receivable * 420 — Sales 125 — Allowance for bad debts 430 Interest income 130 Notes receivable 440 Gains 140 Inventory 150 Prepaid supplies EXPENSES 155 Prepaid rent 510 Cost of sales 160 Prepaid insurance 515 — Freight-out 170 ~=~Land 520 Salaries expense 180 Building 525 Rent expense 185 Accumulated depreciation - Bldg. 530 Utilities expense 190 Equipment 535. Supplies expense 195. Accumulated depreciation ~ Equipment 540 Bad debt expense 545 Depreciation expense - LIABILITIES 550 Advertising expent 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 e738 a- Miscellaneous expense 260 Unearned income 580 Losses EQUITY 310 = Owner's capital 320 Owner's drawingseh a Eg ae et Ee Oe ‘Types of Major Accounts 109 Account numbers are assigned to the accounts to facilitate recording, cross-referencing, and retrieval of information. ‘Although there is no standard way of assigning account numbers, account numbers should be assigned in a manner that the accounts are categorized logically. Each business shall formulate a chart of accounts that best suits its needs. Large corporations may have thousands of accounts and have more digits in their account numbers. Smaller companies may have fewer accounts and fewer digits in their account numbers. As the number of accounts increases, the digits in the account .numbers also increase to accommodate the increased number of accounts. The account titles in the chart of accounts shown above are numbered in the following manner: 1. The first digit in the 3-digit numbering refers to the major types of accounts: Major types of accounts Assigned number ASSETS 1 LIABILITIES 2 EQUITY es 3 { INCOME 4 EXPENSES I 5 ‘Thus, in the chart of accounts, the 3-digit numberings of all assets start with 1; the 3-digit numberings of all liabilities start with 2; etc.110 Se, 2. The second digit in the 3-digit numbering refers to the ace titles and the sequence on how they are listed in the cha accounts. ma Thus, in the chart of accounts, the second digit in the digit numbering of “Cash” is 1 because it is the first a account listed in the chart; the second digit in the 3.4, numbering of “Accounts receivable” is 2 because it js te second asset account listed in the chart; etc. 110 Cash 12 Accounts receivable a ——_—$$<—<$——— ro The second digits refer to specific account titles and the sequence on how they are listed in the chart of accouns 3, The third digit in the 3-digit numbering, if not zero, signifi that the account is a contra account or an adjunct account" to a related account. | 180 | Building — | 185 __| Accumulated depreciation - Bldg. The third digit signifies that this account, ‘Accumulated depreciation - Bidg.,’ is a contra-account to the ‘Building account. (@) Contra and adjunct accounts are discussed in the next chapter. To promote comparability, a business shall use accoutt titles that conform to the PFRSs (Philippine Financial Repott™! Standards) and industry practices. Furthermore, regula businesses should have charts of accounts and/or act numbering system that conform to relevant regulations. example: «The chart of accounts of a bank should conform to the cua accounts endorsed by the Bangko Sentral ng Pilipinas (BS?) aoe aeTypes of Major Accounts iff b. The chart of accounts of a cooperative should conform to the chart of accounts endorsed by the Cooperative Development Authority (CDA); and c. The chart of accounts and the account numbering system of a national government agency must conform to the Revised Chart of Accounts (RCA) issued by the Commission on Audit (COA). Common Account Titles The following are the common account titles and° their descriptions. BALANCE SHEET ACCOUNTS. ASSETS « Cash — includes money or ‘its equivalent that is readily available for unrestricted use, e.g., cash on 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. Another term is “allowance for doubtful accounts.” * 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. For a manufacturing business, inventory also includes goods undergoing the process of production and raw materials that will be consumed in the production process. * Prepaid supplies - represents the cost of unused office and other supplies.112 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 bee constructed or a vacant lot which is to be used as future play site, Land is not depreciable. ¢ Building ~ the structure owned by-a business for use in is operations. « Accumulated depreciation - building — the total amount ¢ depreciation expenses recognized since the building wa, acquired and made available for use. «Equipment - consists of various assets such as: a. Machineries and other factory equipment b. Transportation equipment, e.g., vehicles, delivery trucks c. Office equipment, e.g, desks, cabinets, chairs d. Computer equipment, e.g., server, personal computers laptops Furniture and fixtures, e.g., desks, cabinets, movable partitions 2 (Items ‘c’ and ‘e’ are used interchangeably in practi because they may refer to similar assets. However, the term ‘off equipment’ may be used to strictly refer to those that are being used in the office. For example, a shelf used in the office may be included in ‘office equipment’ while a shelf used to display gous for sale may be included in ‘furniture and fixtures’ Furthermat items included in ‘furniture and fixtures’ are normally those th! are movable. Immovable items are included in ‘building improvement’ account or ‘leasehold improvement’ account)Types of Major Accounts 113 « Accumulated depreciation - equipment - the total amount of depreciation expenses recognized ‘since the equipment was acquired and made available for use, Collectively, land, building and equipment are referred to as “Property, plant and equipment,” “Capital assets,” or “Fixed assets.” LIABILITIES « 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. Accounts payable and accounts receivable are opposites. Meaning, if 1 have an account receivable from you, it means that you have an account payable to me. This is also true for notes payable and notes receivable. “Accounts” vs. “Notes”: You go to a sari-sari store and tell the owner, “Aling Nena, pautang nga po ng isang lata ng sardinas, Pakilista.” In here, Aling Nena has an account receivable from you. On the other hand, you have an account payable to Aling Nena. It is an “account” rather than a “note” because your promise to pay is made orally or informally (ie., ‘pakilista’), Another example: You go to a bank to obtain a loan. The bank requires you to fill up a formal and pre-printed form called promissory note. The promissory note will be notarized by a lawyer and the corresponding documentary stamp taxes will be paid. In here, the bank has a note receivable from you. On the other hand, you have a note payable to the bank. This time, it is a “note” rather than an “account” because your promise to pay is made formally or in writing.114 © Interest payable — interest incurred but not yet paig, payable arises from interest-bearing liabilities. Fo, exam, you will incur interest on your bank loan. Meg Pk, Salaries payable ~ salaries already earned by employee, ' not yet paid by the business. t Utilities payable — utilities (eg, electricity, water, telepho, internet, cable TV, etc.) already used but not yet paid. i ({t should be noted that future interest, salaries and utilities are not recog These items must be incurred first before they are recorded ~ for intrey there must have been a passage of time; for salaries, the services must hay, already been rendered; and for utilities, they must have already been used) « Uneared income — Items related to income that were collectej in advance before they are earned. After the earning process ig completed, these items are transferred to income. 40 Hints: @ The word “receivable” connotes an asset, while the word “payable” connotes a /iability. & The word “prepaid” connotes an asset, while the word “unearned” connotes a Hability. EQUITY (Capital, Net assets or Net worth) » Owner's capital (or Owner's equity) — the residual amoutt after deducting liabilities from assets. The Owner's Capital account is INCREASED by: DECREASED by: » Investments or > Withdrawals or contributions by the distributions to the owner. owner. » Income or Profit earned | > Expenses or Loss incurred »_by the business. by the business.Pee he tyes of Major Accounts 115 Owner's drawings - this account is used to record the temporary withdrawals of the owner during the period. At the end of the accounting period, any balance in this account is closed to the ‘Owner's capital’ account. ¥ INCOME STATEMENT ACCOUNTS INCOME > Gervice fees - revenues earned from rendering services (e.g., services of a spa, services of a beauty salon, etc.). > Sales - revenues earned from the sale of goods (e.g., sale of barbecue, sale of souvenir items, etc.). > Interest income - revenues earned from the issuance of interest-bearing receivables. > Gains - income earned from the sale of assets (except inventory) or from enhancements of assets or decreases in liabilities that are not classified as revenue. EXPENSES > 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 for freight-out are “delivery expense,” “transportation-out,” and “carriage 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 Util electricity, water, telephone, internet, cable TV, ete.) thay ts been used during the accounting period. ie A business can also have separate accounts fo, type of utility, e.g., “Blectricity expense,” “Water ¢, ; “Technology and Communication expense,” and the like > Supplies expense ~ represents the cost of supplies that hay been used during the period. > Bad debt expense ~ the amount of estimated losses fro, uncollectible accounts receivable during the period. Othy term is “doubtful accounts expense.” > Depreciation expense — the portion of the cost of depreciable asset (c.g, building or equipment) that has bea allocated to the current accounting period. » Advertising expense ~ represents the cost of promotional «r marketing activities during the period. > Insurance expense - represents the cost of insurane pertaining to the current accounting period. » Taxes and licenses ~ represents the cost of business and locd taxes required by the government for the conduct of busines (e.g, mayor’s permit, other percentage taxes, community taxes). : For corporations and partnerships, income taxes af recorded in a separate account called “Income tax expense.” v Transportation and travel expense > Transportation expenses represent the necessary am ordinary cost of employees getting from one workplace © another which are reimbursable by the business, @$Types of Major Accounts 117 pet reimbursable taxi fares of employees running some errands and those who are working on late shifts. > Travel expenses represent the costs incurred when travelling on business trips, e.g., out-of-town travel costs of employees sent to seminars. > 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. Other terms for interest expense are finance costs and borrowing costs. Interest expense and interest income are opposites. For example, you will incur interest expense on the money you borrowed from Mr. Bombay. On the other hand, Mr. Bombay will earn interest income. . » 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. Losses may arise from: a. Sale of assets, other than inventory, at a sale price that is less than the carrying amount. b. Decreases in -the value of assets due to destruction, damage, obsolescence and other changes in values caused by market factors, e.g., loss on fire, earthquake, storm, and other calamities, decrease in the value of foreign currencies held due-to changes in exchange rates. 4 Notes: * The term “earned” relates to income, while the term “incurred” relates to expenses. The “unused” portion of a cost is an asset, while the “used” Portion is an expense. For example, the cost of unused office supplies is an asset (prepaid supplies), while the cost of office supplies used during the period is expense (supplies expense). o118 Gy Me, Drills on Account Titles ‘ ASSET ACCOUNTS Accounts receivable * A customer bought barbecue worth P500 from business. He told you that he will pay for it nett wep » The P500 collectible from the customer is recorded gg act receivable, ; a 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 deb expense and accumulated in the allowance for bad debts accu (See also ‘Bad debt expense’ below) Notes receivable * Your friend borrowed P1,000 from your barbecue busines You required from him a written promissory note to repay te money within 30 days plus 1% monthly interest. » The P1,000 collectible from your friend is recorded as nots receivable. Siete TL, patti wily ptt “hclaatin wlss weg Inventory * You purchased pork worth P1,000 to be marinated and sold barbecue. L_babeue » The cost of the pork purchased is recorded as inventory. oo Wate lees foot at gre ch ae aston Prepaid supplies ** You purchased table napkins worth P200 to be used in y% [barbecue operations: wuts | ot AndTypes of Major Accounts 119 , 3 : : » The table napkins, while still unused, are assets recorded as prepaid supplies. When used, they are recorded as supplies expen: ier pene boos upplies expense. (See also 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 (ie., ‘used up’). Equipment You purchased a barbecue grill worth P1,000. » The barbecue grill is an asset recorded as equipment. lotes: © The cost of equipment or similar item that is expected to be | ' used over more than one accounting period is initially recorded | as an asset. @ The cost of this asset is then allocated over the periods in which the equipment is expected to be used. @ The portion of the cost that is 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. 1 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 the “depreciation expense.”120 Loy The depreciation expensé per year is P2009 (P1000... Thus, after a year, the accumulated depreciation Of the "Sy, will be P200 (P200 x 1 yr.); after two years, the Aceiyy depreciation will be P400 (P200 x 2 yrs.); after three eon (P200 x3 yrs.), etc. i g In accounting, depreciation means an allocation the periods where a depreciable asset is used. M Fost, LIABILITY ACCOUNTS Accounts payable 7 * You ran out of inventory of barbecue, so you went tom Porky's Meat Shop to buy pork. You don’t have the avai cash, so you promised orally that you will be paying for pork, worth P500, next week. > The P500 payable is « liability recorded under accounts payable Notes payable % Remember your P1,200 loan from Mr. Bombay? (see previns chapter ©) Well, he required you to write a promissory nt to repay the borrowed money at some future date. > The P1,200 payable is a liability recorded under notes payable. Interest payable * Your loan from Mr. Bombay requires repayment within 9 days plus 20% monthly interest (‘five-six’). At the end of days, you will be incurring interest expense of P240 (12! note payable x 20% interest rate). > Prior to paying the interest, the accrued interest is recorded ® interest payable. (See also ‘Interest expense’ below)ee a es ae eS ON LT \ ‘apes of Major Accounts eo Salaries payable By month-end, total salaries earned 1 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 as salaries payable. Utilities payable “ Your electricity: bill for the month of January amounted to 2,000. The bill is not yet paid. > The unpaid utility already used but not yet paid is recorded as utilities payable. 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. > The account titles “Advances from customers” or “Unearned revenue” may be used in lieu of thie “unearned income” account. EQUITY ACCOUNTS Owner's capital % You invested P800 to your barbeque business. > Your P800 investment is recorded in the Owner's capital account.122 ow, P Semen eee Owner's drawings ; “ You made temporary withdrawals of 200 from barbeque business. > Your P200 withdrawals are recorded in the Owner's rary account. INCOME ACCOUNTS Se ee Sales % You sold barbecue worth P500. > The sale is recorded in the Sales account. For the provision of services, as opposed to sale of goods, tt income account used is the Service fees account. Interest income * After a month, you will have earned the 1% monthly interes on the loan you have extended to your friend. (See ‘Nots receivable’ above.) The interest earned is credited to the interest income account. EXPENSE ACCOUNTS 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 stl sold.ie: : ‘Types of Major Accounts 123 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, amounted to P100. > The delivery costs of P100 are recorded as freight-out. Salaries expense : You hired a helper in your barbecue business. Your employee earns compensation of 8,000 per month. _> At the end of each month, you will record the P8,000 earned by the employee as salaries 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 rent expense of P5,000. 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. Supplies expense * The cost of table napkins used during the period amounted to P50. (See also ‘Prepaid supplies’ above) > The cost of the supplies used is recorded as supplies expense.124 See, Bad debt expense Of your total accounts receivable of P500, you expect to only about P480. ley > The P20 uncollectible balance is recorded as bad debt expens, also ‘Allowance for bad debts’ above) Ge Depreciation expense ~ 4 The P1,000 cost of the barbecue grill will be allocated over ty, years that you will be using it. The amount allocated each ms is called the “depreciation expense.” The depreciation exper, per year is P200 (P1,000 + 5 years). (See also ‘Accurnuaty depreciation’ above.) > At the end of the year, you will record the allocated cost of ty barbecue grill of P200 as depreciation expense. Advertising expense “ You paid Justin Bieber P5,000 to endorse your barbew business. > The P5,000 payment is recorded as advertising expense. Insurance expense “ You have obtained a one-year, fire insurance for yu barbecue stand for P12,000. > The used up portion of the insurance is recorded as insurat expense. al pet Pea Se eae eae ae Taxes and licenses expense + & During the period, you paid local taxes amounting to P500 > The local taxes paid are recorded as taxes and licenses.Oe ee TE ee ype of Major Accounts 125 Interest expense (See Notes payable’ and ‘Interest payable’ above) » Atthe end of the month, you will record P240 interest expense. Loss % Your barbecue grill is stolen! Oh no!.® > 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 400, the carrying amount is P600 (1,000 — 400). Chapter 4 Summary: + An account is a record of the increases and decreases in a specific item of asset, liability, equity, income or expense. It has three parts, namely: (1) account title, (2) debit side, and (3) credit side. * Debit is the left side of an account, while credit is the right side. * The balance of an account is the difference between the total debits and total credits in that account. * The five major accounts are: Assets, Liabilities, Equity, Income and Expenses. * Assets, liabilities and equity are balance sheet accounts, while income and expenses are income statement accounts. * A chart of accounts is a list of all the accounts used by the business. 7 * Account numbers are assigned to each account to facilitate recording, cross-referencing, and retrieval of information,Bi PROBLEMS PROBLEM 1: TRUE OR FALSE ; 4. Chart of accounts jg the basic storage of informaty : accounting, A 2. Debit means the Jeft si right. , 3. The difference between the total debits and total Credits jy 9. account represents the balance of that account. al 4, Anaccount has total debits of #80 and total credits of 20.2 account has a balance of #60. 5. The balance of the account in #4 above is referred to as acyl de of an account, while credit ea 3. balance. 6. If the total debits in an account exceed the total credits, | account would have a debit balance. i 7. There are five major types of accounts used in accounting, Income and expenses are the balance sheet accounts. 9, The “used up” portion of a prepayment (e.g., prepaid rent an expense, while the “unused” portion is an asset. 10, The “used up” portion of supplies bought during the perio called “Prepaid supplies.” > PROBLEM 2: TRUE OR FALSE 1. The right side of an account is called credit. 2. Accounts payable and accounts receivable are opposit meaning if I have an account payable to you, you, in tus) have an account receivable from me. 3. You are selling banana cue. If I buy your banana cue a informally promise to pay for it tomorrow, your ‘accoutt payable’ will increase. 4. In conjunction with #3 above, my ‘accounts receivable’ v4 increase. 5. If after sometime, I haven't paid yet my dues to you in# above, and you don’t expect that I can pay you, you recognize an expense called bad debt expense, ‘ec ‘types of Major Accounts 107 6 An entity that borrows money from the bank would most likely present interest income in its income statement. 7. The terms “receivable” and “prepaid” connote an asset, while the terms “payable” and “unearned” connote a liability. 8, Collectively, land, building and equipment are referred to as “property, plant and equipment.” 9, Gains are income that arises in the ordinary course of business activities. 40, Mr. Monkey's main business activity involves selling bananas. One sime, Mr. Monkey sold an iPhone with carrying amount of P17 for P20. Mr. Monkey recognizes a gain of ®3 on this transaction rather than revenue. PROBLEM 3: FOR CLASSROOM DISCUSSION The Account 1. Account is the basic storage of information in accounting. An account may be depicted through a ‘T-account’. Which of the following is not one of the parts of a T-account? a. Account title c. Right side or credit side b. Leftside or debit sided. Upside down or bottoms up The Five Major Accounts 2. Which of the following is not one of the five major accounts? a. Assets c. Equity b. Income d. Losses 3, Which of the following is not one of balance sheet (statement of financial position) accounts? a. Assets c. Equity b. Liabilities d. Income Chart of Accounts 4. Itis a list of all the accounts used by a business. a. Trial balance c. Chart of accounts b. Contact list d. Organizational chart128 Po th ae bee Ate 5. An account with the following account numbering ay, most likely tobe a(an) a. asset account. c. equity account: b. liability account. d. expense account, Common Account Titles 6. The money held by a business, including the ij increas decreases thereto, is recorded in this account. -a. Cash c. Owner's equity b. Accounts receivable d. Sales 7. Receivables that are supported only by oral or infor promises to pay. a. Cash c. Accounts payable b. Accounts receivable d. Notes receivable 8. Contributions by the business owner to the business ani profits or losses of the business are recorded in this account a. Owner's equity c. Sales b. Owner's drawings d. Salaries expense 9. Revenues earned from the sale of goods are recorded in thi account. a. Inventory income c. Sales b. Goods income d. Service fees 10. This represents the value of inventories that have been sd and consequently charged as expense, during the accountitg period. a. Inventory c. Supplies expen b. Cost of sales (Cost of goods sold) d. Freight-outwo Types of Major Accounts 9 PROBLEM 4; IDENTIFICATION Jnstruction: Indicate the classifications of the accounts listed below as either an ASSET, LIABILITY, EQUITY, INCOME or EXPENSE account under COLUMN A and as either a BALANCE SHEET account or an INCOME STATEMENT account under COLUMN B. COLUMN A COLUMN B Account Titles . Accounts receivable , Bad debt expense 3. Building , Notes payable . Owner's equity Interest income . Cash . Gain 1 2. 3, 4, 5, Rent expense 6, fs 8, 9: 10. Computer equipment 11. Depreciation 12. Utilities payable 13, Freight-out | 14, Rent income 15, Unearned income bate130 TION PROBLEM 5: IDENTIFICA® Instruction: Same as PROBLEM 4 above Account Titles 1. Taxes and licenses 2. Furniture & fixtures 3. Supplies expense 4, Interest expense [5__ Inventory 6. Land 7. Accounts payable oe 8. Notes receivable a 9, Prepaid insurance pT 10. Loss + 1, Prepaid supplies 2. Rent payable 13, Sales '4, Interest receivable 5. Transportation equipment ] PROBLEM 6: IDENTIFICATION Instruction: Identify the account title/accounting term referred in each of the statements below. 1. Increases in assets or decreases in liabilities resulting * increases in equity, other than those relating to transact with the business owner, 2. These represent claims for cash that are supported by 0! " informal promises to pay by a customer. 3. This represents the goods that are held for sale by a busine 4. This account is used to record the costs incurred in marke! or promoting the products or services of a business.ee rypes of Major Accounts 131 5, The financial statement that presents Se assets, liabilities and equity of a business. 6, The expense account used to record the uncollectible portion of accounts receivable, The revenue earned from the sale of goods is recorded in this account. 8. The cost of inventories sold is charged as expense using this account. 9. This is'used to record the cost of supplies used during the period. 40. This account pertains to obligations supported by written or formal promises to pay by the debtor. ~ PROBLEM 7: IDENTIFICATION Instruction: Same as PROBLEM 6 above. 1, The financial statement that presents the income and expenses, and consequently the profit or loss, of a business. 2. Transport costs of delivering goods to customers are recorded in this account. 3. Obligations supported by oral or informal promises to pay. 4, This account is used to record the cost of unused supplies. 5. Itisa liability account that is used to record amounts received from customers in advance of providing goods or services. 6. This represents various small expenditures that do not warrant separate presentation. 7. This account may be used to describe expenses for water, electricity, internet, telephone, and the like. 8. This represents the aggregate amount of estimated losses from uncollectible accounts receivable. This represents the portion of the cost of a depreciable asset (e.g, building or equipment) that has been’charged as expense in the current accounting period.___—»} te cost of a depreciable asset that has the asset was made availa lef, 10. The aggrega Sf charged as expenses since use. PROBLEM 8: MULTIPLE CHOICE 1. Receivables that are supported by written or formal Prong of promissory notes. c. Notes payable d. Notes receivable to pay in the form a. Inventory b. Accounts receivable 2. Goods that are held for sale by a business. a. Cash c. Accounts payable b. Accounts receivable d. Inventory 3. The unused portion of rent paid in advance. a. Prepaid rent c. Cash b. Rent expense d. Inventory 4. Salaries earned by employees but not yet paid. a. Salaries expense c. Employee points b. Salaries payable d. Employee credits 5. Salaries earned by employees, whether paid or not. a. Salaries expense c. Employee points b. Salaries payable d. Employee credits 6. Temporary withdrawals of the owner from the busines during the period are recorded in this account. a. Owner's equity c. Withdrawal expense b. Owner's drawings d. Salaries expense 7. Income collected in advance but not yet earned. a. Unearned income c. Sales b. Early income d. Service feesTypes of Major Accounts 133 8. Obligations supported by oral or informal promises to pay by the debtor. a: Cash c. Accounts payable bp. Accounts receivable d. Notes payable 9, The cost of inventories that have been sold during the period. a. Cost of sales c. Inventory b. Cost of inventories d. Selling expense 10. The amount of estimated losses from uncollectible accounts receivable during the period. a. Good expense c. Ugly expense b. Bad expense d. Bad debts expense PROBLEM 9: MULTIPLE CHOICE 1, A merchandising or manufacturing business uses this account to record revenues earned from primary business activities. a. Sales c. Gains b. Service fees d. Seals 2. Obligations supported by written or formal promises to pay by the debtor in the form of promissory notes. a. Notes receivable c. Accounts payable b. Accounts receivable d. Notes payable 3. The structure owned and being used by a business in its operations. a. Building c. Castle b. Base d. Kingdom 4. The portion of the cost of a building that is already recognized as expenses since the building was acquired and made available for use. : a. Accumulated depreciation ~ building, b. Upkeep . -PROBLEM 10: MULTIPLE CHOICE 1 4 13 a . The cost of gasoline, c. Accumulated upkeep d. Repairs and maintenance expense The cost of unused office and other supplies, a. Prepaid rent ¢. Cash b. Prepaid supplies d. Accounts Teceivable Interest incurred by a borrower but not yet paid. a. Interest payable c. Notes payable b. Interest expense d. Notes receivable Interest incurred by a borrower, whether paid or not, a. Interest payable c. Notes payable b. Interest expense d. Notes receivable The seller’s cost of delivering goods to customers, a. Freight-out c. Freight-good b. Freight-in d. Freight-bad The cost of promotional or marketing activities during te period a. Market expense c. Groceries b. Advertising expense d. Insurance expense hotel accommodation, taxi fare, atl similar expenditures, a. Transportation and travel expense c. Taxi expense b. Interest expense d. Gas expense The cost of the lot on which th been constructed is recorded in a a. Realm. b. Ground. e building of a business '* N account described as c. Land. d. Earth.(ee res, Fe Accounts 135 _ yes of Major Ar Entity A sells an asset that is not an inventory for #100. The 2 carrying amount of the asset is ®180. The 80 difference represents a a. gain. c. revenue. b. Joss. d. interest income. 3, Interest earned by a lender but not yet collected. a. Interest receivable c. Notes payable b. Interest income d. Notes receivable 4, Interest earned by a lender, whether collected or not. a. Interest receivable c. Notes payable b. Interest income " d. Notes receivable 5. Revenues earned from rendering services. c. Unearned income c. Sales d. Rendering income d. Service fees 6. The cost of supplies used in an accounting period. a. Prepaid supplies c. Supplies expense b. Supplies cost d. Surprise expense 7. The portion of the cost of a building or equipment that has been charged as expense in the current accounting period. a. Accumulated deduction —_ c. Accumulated depreciation b. Deduction expense d. Depreciation expense 8. You opened up a business. Your initial investment to the business will be recorded in which of the following accounts? a. Owner's payable c. Notes payable b. Owner's equity d. Accounts payable 9. In conjunction with #8 above, which of the following would most likely be your first expense? a. Equipment B c. Taxes and licenses b. Inventory d. Utilities expenses________ a} 10. You purchased goods that will be held for sale in the org, , course of your business activities. You will record the . c. Accounts receivable, a a pense d. Inventory. b. Income. PROBLEM 11: MULTIPLE CHOICE 1. You are a business owner. Your business needed Addition capital so you obtained a loan from a bank. The bank mady you sign a contract promising to repay the loan after a year, Which of the following accounts is increased by the transaction? a. Accounts payable c. Accounts receivable b. Notes payable d. Notes receivable 2. From the point of view of the bank who lent you the loan in 3 above, which of the following accounts is increased? a. Accounts payable c. Accounts receivable b. Notes payable d. Notes receivable 3. A customer bought goods from your business, on credit. The customer orally promised to pay the sale price next week Which of the following accounts is increased by this transaction? a. Accounts payable c. Accounts receivable b. Notes payable d. Notes receivable 4. From the point of view of the customer who bought goods from your business in #3 above, which of the following accounts is increased? a. Accounts payable c. Accounts receivable b. Notes payable d. Notes receivable 5. When you collected the dues of the customer in #3 above, which of the following accounts is increased?a a 10. Accounts payable c. Accounts receivable p., Cash d. Notes receivable a From the point of view of the customer who paid you in #5 above, which of the following accounts is decreased? a. Inventory c. Accounts receivable b. Cash d. Notes receivable You purchased a. computer for 100,000. Which of the following accounts is increased by this transaction? a. Cash c. Computer equipment b, Owner's capital d. Inventory You expect to use the computer in #7 above over the next 5 years. How much is the depreciation expense per year? a. 10,000 . 7,143 b. 20,000 d. 100,000 ‘After using the computer in #’s 7 and 8 above for three years, how much is the balance of the “Accumulated, depreciation — Computer equipment” account? a. 60,000 c. 20,000 b. 30,000 d. 90,000 At the end of Year 2, how much is the carrying amount of the computer equipment in #’s 7 and 8 above? a. 50,000 c. 60,000 b. 40,000 d.0