5 Major Accounts in Accounting

​Business 1
(Basic Accounting)
Grade 11

By APR

MELC

Distinguish the five major accounts and their classifications.

​Objectives

1. Illustrate the use of Asset, Liabilities, Equity, Income and Expenses account in financial reporting.

2. Be able to analyze scenarios according to substance of the transaction.

3. Express genuine appreciation for how the accurate categorization of financial activities is essential to accomplishing the primary goals of financial reporting.

Activity #1:

Illustrate and explain what is an Asset, Liability, Equity, Income and Expenses.

The Five Major Accounts

Financial Position Accounts (Balance Sheet)

1. Assets

2. Liabilities

3. Equity

Financial Performance Accounts
(Income Statement)

4. Income

5. Expenses

Asset is "a present economic resources controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits".
(Conceptual Framework 4.3 & 4.4)

Examples of Assets

• Cash and property Investments, Cash Equivalents.

• Collectibles and Cash payment received from customers

• Advance Payment received from customers.

• Advance payment to suppliers, employees, affiliates

• Inventories, Office Supplies, Prepaid Rents

• Property, Plant and Equipment

• Investment in equity

Liability is "a present obligation of the entity to transfer an economic resources as result of past events".
(Conceptual Framework 4.26)

Examples of Liabilities

• Outstanding obligations from suppliers.

• Unpaid salaries and wages of employees.

• Advance payment from customers. (Unearned Revenues)

• Mortgage shouldered by the entity from acquiring real properties.

• Unpaid Taxes, and Government Mandatory Obligations.

• Existing Loans from Banks

• Unreleased dividends to stockholders.

"Equity is the residual interest in the assets of the entity after deducting all its liabilities."
(Conceptual Framework 4.63)

Examples of Equity

• Resources brought in to the business by a sole proprietor.

• Withdrawal of resources by a sole proprietor.

• Issued shares of stocks to investors.

• Reacquired issued shares. (Treasury Shares)

• Shares premiums.

• Accumulated earnings(losses) : Retained Earnings

• Other comprehensive income included in the profit or loss.

Activity #2 - Part 1
Apply what you have learned .


Instruction:
For each economic event, analyze its components to identify the appropriate major account to be used.

Multiple Choice

Company's available Cash in checking account.

• Assets

• Liabilites

• Equity

Multiple Choice

The amount owed by the company to suppliers.

• Assets

• Liabilites

• Equity

Multiple Choice

Common stock issued (Investment) to investors to acquire additional funds to operate the business.

• Assets

• Liabilites

• Equity

Multiple Choice

The company availed a 5-year loan expand its business operation.

• Assets

• Liabilites

• Equity

Multiple Choice

The compony bought a Machinery for manufacturing.

• Assets

• Liabilites

• Equity

Multiple Choice

Company's Accumulated Profits for the past 3 years.

• Assets

• Liabilites

• Equity

Multiple Choice

The company availed a Prepaid insurance to protect it from unforeseen losses in the future.

• Assets

• Liabilites

• Equity

Multiple Choice

Unpaid taxes for remittance to BIR.

• Assets

• Liabilites

• Equity

Multiple Choice

The company applied for a Patents for product rights.

• Assets

• Liabilites

• Equity

Multiple Choice

The board of directors of the company decided to declare dividends to be distributed to its stockholders next month.

• Assets

• Liabilites

• Equity

What is Income?

Income is " increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims."
(Conceptual Framework 4.68)

Income is composed of revenues and gains.

What is Expense?

Expenses are "decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holders of equity claims."
(Conceptual Framework 4.69)

Expenses are composed of expenses and losses.

Activity #2 - Part 2
Apply what you have learned .


Instruction:
For each economic event, analyze its components to identify the appropriate major account to be used.

Multiple Choice

Payment received for consulting services provided to a client.

• Income

• Expenses

Multiple Choice

Cost of raw materials used to manufacture products.

• Income

• Expenses

Multiple Choice

Interest earned on a company savings account.

• Income

• Expenses

Multiple Choice

Monthly rent paid for office space.

• Income

• Expenses

Multiple Choice

Salaries paid to administrative staff.

• Income

• Expenses

Multiple Choice

Commission paid to sales agents for closing deals.

• Income

• Expenses

Multiple Choice

Fees collected from customers for software subscriptions.

• Income

• Expenses

Multiple Choice

Advertising expenses for a new product launch.

• Income

• Expenses

Account Classifications

also known as a temporary account, acts as a repository of transaction data for an accounting period of usually one fiscal year.

Nominal Account

also known as permanent account, an account that will always be a part of a company's books once opened

Real Account

Account Classifications

4. Income

5. Expenses

Nominal Account

1. Assets

2. Liabilities

3. Equity

Real Account

Closing entries are use to transfer the nominal accounts to real accounts at the end of the reporting period.

KNOWLEDGE CHECK!!!! 


Instruction:
Determine whether each statement is True or False

Multiple Choice

Real accounts are temporary accounts that are closed at the end of the accounting period.

• True

• False

Multiple Choice

Nominal accounts include revenue, expense, and dividend accounts.

• True

• False

Multiple Choice

The balance of a real account is reset to zero at the start of each new accounting period.

• True

• False

Multiple Choice

A building account is classified as a nominal account because it relates to long-term assets.

• True

• False

Multiple Choice

Nominal accounts appear on the balance sheet.

• True

• False

Multiple Choice

Closing entries are used to transfer the balances of nominal accounts to the retained earnings account.

• True

• False

Multiple Choice

The "Prepaid Rent" account is a real account because it represents a future economic benefit.

• True

• False

Multiple Choice

Interest revenue is a real account because it generates income for the business.

• True

• False

Multiple Choice

Real accounts are also called permanent accounts because their balances are cumulative.

• True

• False

Multiple Choice

The "Accounts Payable" account is a nominal account because it tracks short-term obligations.

• True

• False

Activity #3

Write a short essay response to the question in the next slide.

Open Ended

Why is analyzing an event, such as a scenario, considered the first step in the accounting cycle?