I.

5 Elements of Accounting (Accounts)

1) Assets
a) Current Assets
b) Non-current Assets
Assets that do not meet the criteria to be classified as
current (cannot be converted into cash)
Long-term in nature useful for a period longer than 12
months or the companys normal operating cycle
Fixed assets needed to support the operation of the
business
o Companys property, plant, and equipment. The
account includes long-lived assets, such as a car,
land, buildings, office equipment, and computers.
o Property, plant, and equipment is the title given to
long-lived assets the business uses to help
generate revenue. This category is sometimes
called fixed assets. Examples include land, natural
resources such as timber or mineral reserves,
buildings, production equipment, vehicles, and
office furniture. With the exception of land, the
cost of an asset in this category is allocated to
expense over the asset's estimated useful life.
i) Long-term Investments
Assets held by the company, such as bonds, stocks,
or notes
Long-term investments include purchases of debt or
stock issued by other companies and investments
with other companies in joint ventures. Long-term
investments differ from marketable securities
because the company intends to hold long-term
investments for more than one year or the securities
are not marketable.
Investments for long-term purposes such as
investment in stocks, bonds, and properties; and
funds set up for long-term purposes
ii) Land
Land area owned for business operations (not for
sale)
iii)Building
Structure used to house the office, store or factory
Office building - Provides space to employees for
administering company affairs.

 Such as factory, warehouse, or store

iv)Equipment
Machinery - Used for the production of goods for sale
to customer.
Vehicle - Used in the transportation of company
products and also for commuting.
Office Equipment, Computer Equipment, Delivery
Equipment, and others
Furniture and Fixtures (shelves, tables, chairs,
curtains, lighting fixtures and wall decors)
Typewriter, Air conditioner, Calculator, Filing Cabinet,
Computer and others
v) Accumulated Depreciation
This is a valuation account which represents the
cumulative depreciation expense. It is considered a
contra-asset account and is presented as a deduction
to the related asset.
Off-set account representing expired cost of the
plant, property or equipment as a result of usage and
passage of time
Depreciation is the process of allocating the
depreciable cost of a longlived asset, except for land
which is never depreciated, to expense over the
asset's estimated service life.
o Depreciable cost includes all costs necessary to
acquire an asset and make it ready for use
minus the asset's expected salvage value,
which is the asset's worth at the end of its
service life, usually the amount of time the
asset is expected to be used in the business.
o For example, if a truck costs $30,000, has an
expected salvage value of $6,000, and has an
estimated service life of sixty months, then
$24,000 is allocated to expense at a rate of
$400 each month ($24,000 60 = $400). This
method of calculating depreciation expense,
called straightline depreciation, is the simplest
and most widely used method for financial
reporting purposes.
Some accountants treat depreciation as a special
type of prepaid expense because the adjusting
entries have the same effect on the accounts.
Accounting records that do not include adjusting

entries for depreciation expense overstate assets

and net income and understate expenses.
Nevertheless, most accountants consider
depreciation to be a distinct type of adjustment
because of the special account structure used to
report depreciation expense on the balance sheet.
Since the original cost of a longlived asset should
always be readily identifiable, a different type of
balancesheet account, called a contraasset
account, is used to record depreciation expense.
Increases and normal balances appear on the credit
side of a contra asset account. The net book value of
longlived assets is found by subtracting the contra
asset account's credit balance from the
corresponding asset account's debit balance. Do not
confuse book value with market value. Book value is
the portion of the asset's cost that has not been
written off to expense. Market value is the price
someone would pay for the asset. These two values
are usually different.
o Suppose an accountant calculates that a
$125,000 piece of equipment depreciates by
$1,000 each month. After one month, he makes
an adjusting entry to increase (debit) an
expense account (depreciation expense
equipment) by $1,000 and to increase (credit) a
contraasset account (accumulated
depreciationequipment) by $1,000.
o On a balance sheet, the accumulated
depreciation account's balance is subtracted
from the equipment account's balance to show
the equipment's net book value.

vi)Intangibles

 Assets that lack a physical presence (you cant touch

or feel them). Patents, trademarks, and goodwill
classify as noncurrent assets.
Long-term assets with no physical substance, such as
goodwill, trademark, copyright, etc.
2) Liabilities
Existing debts or obligations that a reporting entity owes
to other persons or entities
Liability is an obligation of the entity to transfer cash or
other resources to another party.
Company's existing debts and obligations owed to third
parties
Economic obligations or payables of the business
A present obligation of the entity arising from past events
(transactions) which will eventually result to an outflow of
cash.
Liabilities are your companys current obligations. They
arise from past events such as obtaining a loan to buy
equipment for your business. These past events create an
obligation that you cannot avoid.
To qualify as a liability, an item must:
o Require sacrifices of future economic benefits or
payment of funds;
o Involve a present obligation to make those future
payments;
o Be owed to another entity; and
o Result from past transactions
Transfer of assets can settle liabilities.
o For example, when you hire employees, you promise
to pay cash for their services. Hiring the employee is
the past event and your promise to pay is your
obligation that you cannot avoid once the employee
provides the service. Issuing a paycheck is the
transfer of the asset, cash.
a) Current Liabilities
Due in 1 year or less
Debts reasonably expected to be liquidated in the
normal course of the enterprises operating cycle or
paid within a period of one year
If the company's normal operating cycle is longer than
12 months, a liability is considered current if it is due
within the operating cycle.
i) Trade and other payables
(1)
Accounts Payable

(2)

(3)
(4)

(5)
(6)
(7)

(8)

To trade creditors for purchase of goods or

services on credit supported by the oral or implied
promise of the business
Amounts owed to suppliers for goods or services
received
Notes Payable
Liability to pay a bank or a financing institution for
amount of money borrowed by business
Amounts owed to banks for principal and interest
on loans
Wages Payable
Amounts owed to employees for work performed
Accrued Interest Payable
Liability to pay utility companies like PLDT,
Meralco and MWSS for telephone, electricity and
water services received for them
Rent Payable
SSS Premium Payables
Interest Payable, Salaries Payable, Taxes Payable
Bank Overdrafts
A bank overdraft is a limit on borrowing on a bank
current account.
When a business' bank account has a negative
balance it is said to be running a bank overdraft
An overdraft allows the individual to continue
withdrawing money even if the account has no
funds in it.
As with any loan, you pay interest on the
outstanding balance of an overdraft loan. Often
the interest on the loan is lower than credit cards.
When the bank has a right to offset the overdraft
balance with another bank account of the
business, the overdraft is netted off against the
other bank accounts maintained with the same
bank and the net bank balance is shown as the
balance of cash at bank.
o When the bank has no such right to offset,
the overdraft is reported as a liability and
when it is material it should be reported
separately from other liabilities.
Loans Payable
Amounts that have been loaned to the company
and that it still owes.

 A loan payable differs from accounts payable in

that accounts payable do not charge interest
(unless payment is late), and are typically based
on goods or services acquired. A loan payable
charges interest, and is usually based on the
earlier receipt of a certain sum of cash from a
lender.
As an example of a loan payable, a business
obtains a loan of $100,000 from a third party
lender and records it with a debit to the cash
account and a credit to the loan payable account.
After one month, the business pays back $10,000
of the loan payable, plus interest, leaving $90,000
in the loan payable account.
(9)
Withholding Tax Payable (retention tax)
A government requirement for the payer of an
item of income to withhold or deduct tax from the
payment, and pay that tax to the government
Income tax withheld from employees' wages and
paid directly to the government by the employer.
ii) Current Provisions
Estimated short-term liabilities that are probable and
can be measured reliably
iii)Short-term Borrowings
Financing arrangements, credit arrangements or
loans that are short-term in nature
iv)Current-portion of a Long-term Liability
The portion of a long-term borrowing that is currently
due.
Example: For long-term loans that are to be paid in
annual installments, the portion to be paid next year
is considered current liability. The rest, non-current.
v) Current Tax Liabilities
Taxes for the period and are currently payable
b) Non-current Liabilities
Not due within the next 12 months after the end of the
accounting period or the company's normal operating
cycle, whichever is shorter
Long term liabilities or obligations which are payable
longer than 1 year
Not currently payable
i) Long-term Notes, Bonds, and Mortgage Payables
(1)
Long Term Debt

 Issued to the creditor and evidenced by a

promissory note
(2)
Bond Payables
Formal contract containing the face value of the
bond, interest rate, interest payment and maturity
date
ii) Debenture
A type of debt instrument that is not secured by
physical assets or collateral.
Debentures are backed only by the general
creditworthiness and reputation of the issuer.
Debentures have no collateral. Bond buyers
generally purchase debentures based on the belief
that the bond issuer is unlikely to default on the
repayment.
Both corporations and governments frequently issue
this type of bond in order to secure capital.
iii)Deferred Tax Liabilities
iv)Other Long-term Obligations
3) Capital (Equity)
Net assets
What the owners of an entity have invested in an
enterprise
o Represents what the business owes to its owners
Refers to what is left to the owners after all liabilities are
settled
Represents the claim of the owner over the asset of the
business after deducting all the liabilities
Represents the amount owed to the owner or owners by
the company
o A type of liability an entity has towards its owners in
respect of the assets they financed
Total ASSETS Total LIABILITIES = NET ASSETS/ OWNERs
EQUITY
This is what the owners take home in the event of
liquidation of the entity.
Capital is affected by the following:
o Initial and additional contributions of owner/s
(investments)
o Withdrawals made by owner/s (dividends for
corporations)
o Income
o Expenses

 Owner contributions (investments) and income (revenues)

increase capital.
Withdrawals and expenses decrease it.
The terms used to refer to a company's capital portion
varies according to the form of ownership.
o In a sole proprietorship business, the capital is called
Owner's Equity or Owner's Capital
o In partnerships, it is called Partners' Equity or
Partners' Capital
o In corporations, Stockholders' Equity.
In a sole proprietorship or partnership, owner's equity
equals the total net investment in the business plus the
net income or loss generated during the business's life.
Net investment equals the sum of all investment in the
business by the owner or owners minus withdrawals made
by the owner or owners. The owner's investment is
recorded in the owner's capital account, and any
withdrawals are recorded in a separate owner's drawing
account.
o For example, if a business owner contributes $10,000
to start a company but later withdraws $1,000 for
personal expenses, the owner's net investment
equals $9,000. Net income or net loss equals the
company's revenues less its expenses. Revenues are
inflows of money or other assets received from
customers in exchange for goods or services.
Expenses are the costs incurred to generate those
revenues.
o Capital investments and revenues increase owner's
equity, while expenses and owner withdrawals
(drawings) decrease owner's equity.
o In a partnership, there are separate capital and
drawing accounts for each partner.

Stockholders' equity. In a corporation, ownership is

represented by shares of stock, so the owners' equity is
called stockholders' equity or shareholders' equity.
o Corporations use several types of accounts to record
stockholders' equity activities: preferred stock,

common stock, paidin capital (these are often

referred to as contributed capital), and retained
earnings.
o Contributed capital accounts record the total amount
invested by stockholders in the corporation. If a
corporation issues more than one class of stock,
separate accounts are maintained for each class.
o Retained earnings equal net income or loss over the
life of the business less any amounts given back to
stockholders in the form of dividends. Dividends
affect stockholders' equity in the same way that
owner withdrawals affect owner's equity in sole
proprietorships and partnerships.

4) Income (Revenue)
Income is measured every period and is ultimately
included in the capital account.
Results from sales and the delivery of services
Can result in increases to assets accounts or decreases in
liability accounts
Represents the inflow of cash or other assets from clients
and customers for service rendered or merchandise sold
The total amount of money received by the company for
the goods sold or services provided during a certain time
period
Income is accounted for under the accruals principal
whereby it is recognized for the whole accounting period
in full, irrespective of whether payments have been
received or not.
Revenues include all inflows to an entity that increase the
capital or net assets of the entity, such as:
o Government payment for outputs
o Contributions such as grants or gifts to the entity,
including resources received free of charge
o User charges
o Interest
o Other revenue (ex: from sales of inventory or other
assets)

 Revenues that a department might collect on behalf of the

Territory include rates, taxes, fees, fines and
Commonwealth Government grants.
Income encompasses revenues and gains.
o Revenues refer to the amounts earned from the
companys ordinary course of business such as
professional fees or service revenue for service
companies and sales for merchandising and
manufacturing concerns.
o Gains come from other activities, such as gain in
selling old equipment, gain on sale of short-term
investments, and other gains.
a) Sales Revenue
Income earned in the ordinary course of business
activities of the entity
Example: Sale revenue generated from the sale of a
commodity
b) Service Income/ Service Revenue
c) Professional Fees
d) Commission Income
e) Interest Income
Example: Interest received on a bank deposit
f) Rent Income
Example: Rentals received on property leased by the
entity
g) Gain on Sale of Other Assets
Income that does not arise from the core operations of
the entity
For Example:
o Sale revenue of a business whose main aim is to
sell biscuits is income generated from selling
biscuits. If the business sells one of its factory
machines, income from the transaction would be
classified as a gain rather than sale revenue.
o Gain on re-valuation of company assets
5) Expense
Like income, expenses are also measured every period
and then closed as part of capital
The cost of bringing in revenues
The consumption of asset or using up of service to
generate revenue
Costs incurred in the entity's operations and service
delivery

 Expenses are decreases in economic benefit during the

accounting period in the form of a decrease in asset or an
increase in liability that result in decrease in equity, other
than distribution to owners.
o For example, the fuel that your delivery truck
consumes is an expense. When you buy gas for the
truck, it reduces your cash, which is your asset.
Similarly, if you buy gas using a credit card, it
increases your liability.
Expenses are often repeating events.
o For example, you must pay your vehicle leases by
the same date each month. The moment you record
an expense depends on the accounting basis you are
using.
Most businesses use the accrual basis. When you use the
accrual basis, you record the expense before you pay it.
The entry is to record a debit in the expense account and
a credit in the liability payable account.
Conversely, if you use cash-basis accounting, you record
the expense only when you pay for it. In this case, you
record a debit to the applicable asset account, usually
cash, and a credit to the expense account
a) Ordinary Expenses
i) Cost of Sale
ii) Advertising Expense
iii)Rent Expense
iv)Supplies Expense
v) Repairs Expense
vi)Salaries and Wages Expense
vii) Doubtful Account Expense
viii) Depreciation Expense
ix)Insurance Expense
x) Taxes and License Expense
b) Losses
i) Loss from Fire
ii) Typhoon Loss
iii)Loss from Theft

II.

Chart of Accounts

Asset Accounts

Liability Accounts

Owner's Equity Accounts

Operating Revenue Accounts

Operating Expense Accounts

Non-Operating Revenues and Expenses, Gains, and Losses

file:///C:/Users/WINDOWS7/Documents/College
%202/2nd%20Sem/IS%20204/57751284-5-Elements-ofAccounting.pdf
http://www.cliffsnotes.com/moresubjects/accounting/accounting-principles-i/principlesof-accounting/the-accounting-equation
http://www.accountingverse.com/accountingbasics/elements-of-accounting.html
http://quizlet.com/40187605/5-elements-of-accountingequation-flash-cards/original
http://smallbusiness.chron.com/basic-elementsaccounting-55911.html
http://www.cliffsnotes.com/moresubjects/accounting/accounting-principlesi/adjustments-and-financial-statements/depreciation
http://accountinator.com/2012/05/assets-vs-expenses/