CHAPTER 3

ACCOUNTING ELEMENTS AND ACCOUNT TITLES

Accounting Elements-are the broad classifications of accounting values in which similar transactions and
events are grouped.
The different accounting elements are:
1. Assets
2. Liabilities
3. Capital or Equity
4. Revenue
5. Expenses

STATEMENT OF FINANCIAL POSITION ACCOUNTS

ASSETS
Assets are resources controlled by the enterprise as a result of past transactions, events, and from which
future economic benefits are expected to flow to the enterprise.
For an item to be classified as asset, it must satisfy the following requisites:
1. resources of the business
2. controlled by the enterprise
3. result of past transactions or events
4. expected to give future benefits
CLASSIFICATION OF ASSETS
1. Current Assets
2. Non-current Assets
CURRENT ASSETS-An asset is classified as current when it satisfies any of the following criteria:
a. It is expected to be realized in, or is intended for sale or consumption in the entity’s normal
operating cycle;
b. It is held primarily for the purpose of being traded;
c. It is expected to be realized within twelve months after balance sheet; or
d. It is cash or cash equivalents unless it is restricted from being exchanged or used to settle
liability for at least twelve months after balance sheet date.
The account titles of typical current assets accounts will include the following:
1. cash
2. cash equivalents
3. petty cash fund
4. notes receivable
5. accounts receivable
6. (allowances for doubtful accounts)
7. advances to officers and employees
8. supplies
9. prepaid expenses
Cash-is the account title that describes money, either in paper or coins. The term cash will also include money
substitutes. Examples of money substitutes are checks, postal money orders, bank drafts and treasury
warrants.
Cash Equivalents-short term, highly liquid instruments that are readily convertible into cash and they present
insignificant risk of changes in values because of changes in interest rates.
Petty Cash Fund-represents money placed and set aside for “petty” or small expenses.
Notes Receivable-represents collectibles from customers or clients arising from sale of goods or services
which are supported by promissory notes executed by customers.
Accounts Receivable-collectibles from customers arising from credit sales of goods or services, and not
supported by promissory notes
Estimated Uncollectible Accounts/Allowance for Doubtful Accounts-an “asset offset” or “contra-asset”
account which provides for possible losses from uncollected accounts receivable.
Advances to Officers and Employees- amounts collectible from employees for allowing them to make cash
advances which are deductible against their salaries or wages.
Inventories-these are assets which are held for sale in the ordinary course of business.
Supplies or Supplies on Hand or Unused Supplies- represents the cost of paper, pencil, pen, ink and other
related supplies purchased, and used, but still on hand at the end of the accounting period. In other words,
the account refers to unused supplied.
Example: Store supplies, office supplies, shop supplies, manufacturing supplies
Prepaid Expenses- represents expenses that are paid in advance but not yet incurred or remain unexpired at
the end of the period.
Example: Prepaid rent, Prepaid Insurance, Prepaid Interest, Prepaid Advertising

NONCURRENT ASSETS-are properties or resources controlled by the business not classified as current assets
as a result of past events and from which future economic benefits are expected to flow to the entity.
Although the Philippine Financial Reporting Standards (PFRS) does not expressly categorize the presentation of
noncurrent assets, the following line item classification are normally made:
1. property, plant and equipment
2. long-term investments
3. intangible assets
4. other noncurrent assets

Property, Plant and Equipment represents tangible assets which are held by an enterprise for use in
production or supply of goods and services, for rentals to others or for administrative purposes and are
expected to be used during more than one period.

The following accounts are classified as property, plant and equipment:

1. land
2. building
3. machinery
4. equipment
5. (accumulated depreciation)
6. furniture and fixtures
Land- refers to the site where the administrative building, the store or the plant is located. The land should be
used in the day to day operation of the business.
Building-used for the building structures of the business which usually includes the administrative building,
the warehouse, the processing plant and the store outlet.
Machinery-represents machines used by the business in the production process
Equipment-includes calculators, typewriters, adding machines, computers, steel filing cabinets. Example office
equipment, store equipment, delivery equipment
Furniture and Fixtures- this account title includes chairs, tables, counters, display cases, cabinet and others.
Accumulated Depreciation-an “asset offset” or “contra asset” account deducted from property, plant and
equipment. It is deducted from related property and except land. The term “accumulated depreciation” simply
refers to the sum of depreciation for several years. Depreciation represents the expense portion of the asset
because of the wear and tear.
Long-term Investments-assets held by business entity for the purpose of accumulating wealth through capital
distribution such as interest, royalties, dividends or rentals. Example investment in stocks, investment in bonds
and others.
Intangible Assets-refer to identifiable nonmonetary assets without physical substance that are controlled by
the entity as a result of past event and from which future economic benefits are expected to flow from the
entity. Example copyright, patent, franchise, trademark, lease right, formula and computer software.
Other Non-current Assets-Non-current assets that could not be classified in the above classification (property,
plant and equipment, long term investments, intangibles) are presented as other non-current assets.
The following accounts are classified under other non-current asset:
1. long-term advances to officers and employees
2. long-term advances to directors and stockholders
3. long-term refundable deposits
4. abandoned property, plant and equipment

LIABILITIES
Liabilities are present obligations of the enterprise arising from past transactions or events, the settlement of
which is expected to result in an outflow from the enterprise of resources embodying economic benefits.
An item is considered a liability if the following requirements are met:
1. present obligation
2. arises from past transactions
3. settlement results to outflow of resources
4. the transactions provide economic benefits
CURRENT LIABILITIES
A liability is classified as current liability when it satisfies any of the following criteria:
a. it is expected to be settled in the entity’s normal operating cycle;
b. it is held primarily for the purpose of being traded;
c. it is due to be settled within twelve months after balance sheet date; or
d. the entity does not have an unconditional right to defer settlement of the liability for at least twelve
months after the balance sheet date
CURRENT LIABILITIES ACCOUNTS
The following account titles are common example of current liabilities:
1. accounts payable
2. notes payable
3. bank payable or loan payable
4. accrued expenses
5. utilities payable
6. salaries payable
7. interest payable
8. unearned income
 Accounts Payable-denotes obligation or debts of the business arriving from services received,
merchandise, supplies or property, plant and equipment acquired in account. Accounts payable is an
“open account” because it is not supported by promissory notes.

Notes Payable-is similar to accounts payable, however, the former account is supported by a
promissory note executed by the business in favor of the creditor or supplier of goods and services.

Bank Payable or Loan Payable- represents the financial obligations to banks and other financial
institutions. Bank loan can be short-term or long-term. Short-term if the term of the loan is less than
one year; and long-term if the period of the loan is beyond one year.

Accrued Expenses- these are expenses incurred by the enterprise but are not yet paid.

Utilities Payable-denotes obligations to utility company for the use of utilities in the business
operation. The items that are classified as utilities include light, water and gas.

Salaries Payable-represents unpaid salaries of employees and workers for the services rendered as of
the date of the financial statements.

Interest Payable-represents unpaid interest to the bank or other financing institutions because of the
amounts borrowed.

Unearned Income-refers to an income collected or received in advance, but is not yet considered as
earned. The other account title for unearned income is pre-collected income.

NONCURRENT LIABILITIES
Noncurrent assets are financial long term obligations of the enterprise which are due and payable for
more than one year.

1. Notes Payable
2. Mortgage Payable
Notes Payable (long term)-same nature with that of Notes Payable (short-term but only, this requires
payment for more than one year.
Mortgage Payable-a financial obligation of the enterprise which requires a fixed tangible property to
be pledged as a collateral to ensure payment.

OWNER’S EQUITY OR CAPITAL

Owner’s Equity or Capital is the residual interest in the assets of the enterprise after deducting all its
liabilities. It is expressed in the equation as Assets less Liabilities equals Owner’s Equity or Capital. It is
increased when there is Profit or Additional contributions by the owner and decreased when there is
Loss or Withdrawal by the owner.

Withdrawal-is the withdrawal made by the owner. The owner’s withdrawal will decrease the capital.

STATEMENT OF FINANCIAL PERFORMANCE ACCOUNTS

INCOME OR REVENUE-gross inflow of economic benefits during the period arising in the course of ordinary
activities of an enterprise when those inflows result in increase in equity, other than those relating to
contributions from owners. Example, services rendered by a servicing firm and sale of merchandise by a
trading firm.
Gains include income from activities and events that do not form part of the ordinary course of the business
operation. Example is gain on sale of property, plant and equipment, etc.
Service Income- used for all types of income derived from rendering of services. Sometimes the account title
used is Service Revenue. Other specific income account titles used are:
Professional Income-used by professionals for income earned from the practice of their profession or
may be specified as Accounting or Auditing Fees Income for Accountants, Legal Fees Income for Lawyers,
Dental Fees Income for Dentists, Medical Income for Doctors, etc.
Rental Income-for income earned on buildings, space or other properties owned and rented out by the
business as the main line of its activity.
Interest Income-for income received by the business arising from an amount of money borrowed by a
customer and is usually covered by a promissory note. This is typical in a lending institution.

EXPENSES-are the gross outflow of economic benefits during the period arising in the course of ordinary
activities of an enterprise when those outflow result in decrease in equity, other than those relating to
distribution to owners. Examples are salaries expense, rent expense, supplies expense, etc.
Losses represent decreases in assets or increases in liabilities arising from that activities or events that are
outside the ordinary course of business operation. Examples are the loss from sale of property and equipment,
etc.

Profit (Loss) - the excess of revenues over expenses is called “Profit”. If expense exceed the revenues it is
called a “Loss.”

Interest Expense- an expense incurred from borrowed money.

Rent Expense- the amount paid or incurred for use of property, usually premises.
Repair and Maintenance-for expenses incurred in repairing or servicing the buildings, machineries,
vehicles, equipment, etc. which are owned by the business.
Stationary and Office Supplies Expense-the stationary, envelopes, clips, fasteners, etc. used in the
office will bear the accounting title Office Supplies; If use in the store, Store Supplies or another title
may be used to described the kind of supplies used.
Salaries Expense-for compensation given to employees of a business.
Depreciation Expense-for the portion of the cost of property and equipment or fixed assets that has
expired based on rational and systematic allocation process.
Amortization Expense- the expired or expense of intangible asset.
Taxes and Licenses-the amount paid for business permits, licenses, and other government dues.
Insurance Expense-account title for the expired portion of the insurance premium paid.
Utilities Expense-the account title for telephone, light and water bills.
Gas & Oil- the account title for gasoline, diesel, lubricants, grease, oils, etc. for use by company
vehicles.
Miscellaneous Expense-any amount paid as expense which is not significant enough to warrant a
particular classification.