Chart of Accounts

In Accounting, you will commonly see the term chart of accounts. This is the term used for how companies name
transactions. It also groups up these transactions into the components of the Accounting Equation. They are assigned
codes that are used in the ledger of the company. A ledger is another type of financial document that you will learn
about in this section. Some of the common Chart of Accounts titles would be: cash, accounts receivable, accounts
payable, capital (also known as equity or common stock), drawings, and revenue (also referred to as sales). In this Chart
of Accounts, you can look at the meaning of the different accounts titles used so that you can evaluate transactions and
classify them based on the chart of accounts that we will use.

Remember that this will not always be the same as different companies may have more specific account titles.
Generally, the bigger a company is, the more elaborate their chart of accounts will be. For example, a smaller company
may use the account title cash to contain all transactions that involve the use of cash. Meanwhile, larger companies use
the following terms: petty cash, cash in bank, and cash on hand to further describe cash transactions.
Cash
Cash is one of the most fundamental account titles used as all transactions will eventually involve cash. For our activity,
any transaction that involves the use of cash will be titled as a cash transaction. For example: a company buys
equipment worth P50,000. The company will pay for half of it using cash and the other half using a credit card. In this
scenario, cash will be used for P25,000 of that equipment purchase.
Accounts Receivable
Accounts Receivable is another very common account title. Essentially, what an Accounts Receivable title means is that
someone owes you money to be paid, usually within a 30 day time frame. Most companies will have terms regarding
their Accounts Receivable, giving discounts when the receivable is paid at an earlier time than the usual 30 day time
frame.

For example, a large company orders 250,000 units of iPhone 6S, at factory price. Let's say that's it's worth P30,000
each. That would be a total of P7.5B (billion). Let's face it, no one carries that much cash around. What Apple will do is
they will ship these devices to the customer and they will have a receivable amount of P7.5B which can then be paid
within 30 days. Apple will then have an Accounts Receivable of P7.5B. Some companies further categorize their
Accounts Receivable by adding a hyphen at the end with the company name. This helps companies track which
customers still owe them money.
Equipment
Equipment would contain items that are used in the operation of a business. Things like cash registers and computers
would be classified under this account title. These objects are not items that are up for sale but are used for the
business to function properly. These are generally items that are used for longer periods of time or for their entire
usable lifetime. These items are usually depreciated at the end of an accounting period. Depreciation is a concept that
you will learn in Accounting Management 2.
Furniture & Fixtures
These are items like equipment that are not sold to customers but aid in the generation of income. This would include
things like office desks, chairs, cabinets, etc.
Accounts Payable
Accounts Payable would be the reverse of Accounts Receivable in the sense that this means that your company owes
money to someone else. Similar to Accounts Receivable, this usually spans 30 days for payment to be completed, with a
discount for paying early. This is usually an arrangement between companies to pay for goods and services.

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Let's say for an example: Your company buys fabric, which is a material that you use for production, worth P2.5M. Your
supplier will account that as Accounts Receivable. Your company will then have Accounts Payable for the same
transaction. So as an accountant, you will always think of money as coming from or going to your company.

Now, if your company decides to apply for a loan from a bank, this would not be an Accounts Payable, as loans are
generally paid over a longer period of time and would have the account title, Loans Payable.
Supplies
Supplies are also not directly sold to customers but are used by the company to generate income. Supplies would
generally include items such as envelopes, bond paper, markers, etc. When companies buy these items, they are
normally in bulk and stored until it is used up. These are not usually stored for long periods of time, usually expected to
be used up by the end of the month or quarter.
Discount
Discount is actually classified as a contra-revenue account, meaning it is against revenue. Let's say for example a
product that you sell is sold at the price of P500 and you give your customer a discount of 10% or P50. Your company
would still generate a sale of a product worth P500, but you would only receive P450 cash. The other P50 that is missing
would then be classified as a discount.
Notes Payable
This account title is similar to Accounts Payable in that it would be an amount that will need to be paid. However, the
terms of how and when the payment must be paid is clearly defined in a document called the promissory note. This is
signed by the person who owes the money making them more financially liable for the amount.
Capital
Capital is often accompanied by a name such as Raffy Reyes, Capital or Capital - Raffy Reyes. This is to denote
ownership in the organization. When a business owner puts his own money into his company for the company to use to
gain assets and make profit, he gains ownership over that part of the business. In sole-proprietorship, this is easy to
determine as the cash investment mainly comes from the owner. In corporations, ownership can be labeled as common
stock since there is more than one person with ownership in the business.
Drawing
There are cases wherein a business owner will have to take money out of the business. This is when a drawing occurs.
Essentially, the owner withdraws part of his share in the business. For example, an owner who has P200,000 of capital
in the business can choose to withdraw P25,000 of cash from the business that he will spend in paying for a new car for
himself. Since his purchase is not directly used in any type of business operation, unless he were a sales agent and
would have to travel to different locations for the business, he now only owns P175,000 of the business instead of
P200,000.
Service Revenue
As the name entails, service revenue is something that is earned by providing a service. Let's say for example, someone
pays you to cut their grass for them. That is a service revenue since there isn't actually a product that is being bought.
What people are going to pay for is to have you cut their grass.
Marketing Expense
These are expenses that are incurred through promotion of your company's brand. It can involve items such as: hiring a
marketing expert, advertising, creating a brand profile, etc.
Utilities Expense

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Utilities Expense accounts for payments made to operational utilities such as water, electricity and phone service.
Supplies Expense
Supplies Expense is tied directly to supplies. Remember that supplies are usually stored when it is bought and are
generally expected to be used up within a certain period. When you use up supplies, your amount of supplies lessen
but you no longer have to pay cash for them since you have already paid cash when you bought the supplies.
Salaries Expense
Any employee of the company will generally earn a fixed salary. This account will contain the bulk of that amount.
Rent Expense
In our scenario, rent expense will be used to account for the rental of the office property. A company that does not
have it's own land and building will have an account titled Rent Expense.
Retained Earnings
Retained Earnings is the account title that is used to record the net income at the end of the accounting period, that
goes back into the business. For example: At the end of the year, a business has a Sales Revenue of P100,000 and a
total of P25,000 in expenses. In a sole proprietorship type of business, once you deduct the P25,000 from the P100,000
(equivalent to P75,000), that will be reinvested into the business and called Retained Earnings. Retained Earnings is
equivalent to your Income Summary account which is the next item on this list.
Unearned Revenue
Unearned Revenue, although it has the word revenue, is actually considered a liability account. This is when a company
has already paid for a service that you have not yet rendered so you would still owe someone the service.

For example: You are an events organizer and you have been asked to organize a birthday party by a client next month
with a budget of P45,000. The client has already paid you P45,000 in advance. You already have the cash but have not
yet performed the service so this is tagged as an unearned revenue. It will change into service revenue, once you have
completed the service, the following month.
Income Summary
Income Summary is an account title that is only used at the end of an accounting period. All revenue accounts and
expense accounts are eventually closed at the end of the accounting year. That being the case, when these entries are
closed, they are closed into the income summary account. This is not something that you will get based on a
transaction in business, but a title used only at the end of the period which will also be closed out to Capital or Retained
Earnings.

For example, at the end of the year, a business has a Sales Revenue of P100,000 and a total of P25,000 in expenses. In a
sole proprietorship type of business, once you deduct the P25,000 from the P100,000 (equivalent to P75,000), you will
get the amount that will be in the Income Summary. The income summary does not have a normal balance.
Prepaid Insurance
Prepaid Insurance is a type of current asset whereby insurance for a given period is paid in advance. It is related to the
account title Insurance Expense as when the period expires the Prepaid Insurance is adjusted in order to reflect part of
it being used up.

Averkamp, Harold. "Prepaid Insurance Definition." AccountingCoach.com. N.p., n.d. Web. 20 Dec. 2015.
<http://www.accountingcoach.com/terms/P/prepaid-insurance>.
Purchases

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Purchases is an asset account that shows the purchase of additional goods to be sold. This account title is used in the
Periodic Inventory System. Even though this is an asset account, this is actually considered a temporary account and
will need to be closed out at the end of the year in order to obtain the Inventory account title which will be used as the
beginning inventory for the next accounting period.
Purchase Returns and Allowances
This is a contra-asset account to purchases. This is used when a good that is bought by a company is returned to the
supplier. This only appears in the Periodic Inventory System.
Purchase Discounts
This is another contra-asset account for the title, Purchases. Usually, when a purchase is made, there are terms in
which payment must be made. If payment for the purchase is made early, there is usually a discount for the purchase.
Merchandise Inventory
Merchandise Inventory is an account title used in the Perpetual Inventory System. It is the account title used to record
any addition or reduction in inventory size for the Perpetual Inventory System.
Loans Payable
Normally, the account title used for liabilities is Accounts Payable. In instances where the amount owed is going to be a
large amount, such as for the purchase of land or a commercial building, companies may opt to borrow money from
another institution and pay a loan which is paid for longer periods of time. When this takes place it is usually in the
form of a loan. A loan is when an amount is borrowed and the terms of payment are clearly defined along with the
interest to be paid on top of the amount borrowed. The terms of payment is at least for one year which makes this
account title a Long Term Liability.
Sales
Sales is a Revenue account title that is used in the Periodic Inventory System. It is used to account for income coming
from the selling of products. This account title is only used for the recording of the revenue coming and not for the
changes in the value of the inventory. In the Periodic Inventory System, changes in the inventory are accounted for at
the end of a particular accounting period using a different account title.
Sales Returns and Allowances
This account title is a Contra Revenue account that is used to record when a customer returns a product that was sold
to them. This account normally has a debit balance. This is eventually closed out at the end of the accounting period.
Sales Discounts
This is another Contra Revenue account for the account title, Sales. This is used to account for discounts received for
customer who have paid for goods they have bought early. This is associated with the terms of sales that are indicated
during purchase.
Insurance Expense
This is an expense account used to account for using up the coverage of insurance. This means that when insurance is
purchased, it usually covers a certain period, like a month. When that month expires, the coverage of the insurance is
also used up. Once the insurance is already used up, it is tagged as an expense.
Freight In
Freight In is a type of expense account that is usually associated with purchase of additional inventory or raw materials.
This is expense used when upon the purchase of goods or raw materials, your company will have to shoulder the
transportation cost of getting the goods or materials. This charge will appear in your company's books for purchases
with FOB Shipping Point. This only appear in the Periodic Inventory System as in the Perpetual Inventory System, the
charge appears as part of Merchandise Inventory.

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 Freight Out
Freight Out is a type of expense that is associated with the selling of goods and materials. This expense is used to
account the transportation cost of the goods when sending them out to customers. This charge will appear in your
company's books if it is FOB Destination.
Cost of Goods Sold
On its own, Cost of Goods Sold (COGS) is the term used to refer to the expenses that a business incurs for the products
that they are selling. If used as an account title, it is used in the Perpetual Inventory System to record the expense for
the selling of the good or product. Essentially, in the Perpetual Inventory System, there are two transactions during a
sale; the first one is to account for the Sale and second is to account for the Expense of the sale.

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