1.2 Types of Accounts

  1. Assets – are resources or things of value owned by the business entity. They are resources that will be used up as an expense over the period or periods. The common examples are shown in the Chart of Accounts. The sub-classification of the Asset category is discussed in Chapter 5. Some frequently used assets are:

    1. Cash-in-bank – coins and currencies deposited in the business account. For this Practice Set, we will use the account name, Cash, to simplify our discussions. Refer to Chapter 4 for Bank Reconciliation.

    2. Petty Cash - used for small disbursements of Cash. Refer to Chapter 4 for further discussions.

    3. Accounts Receivable – arises from money to be received in the future for professional services rendered by the business or sales of merchandise on account.

    4. Notes Receivable – arises from money to be received in the future for professional services rendered by the business or sales of merchandise evidenced by a promissory note.

    5. Supplies – examples are the Medical Supplies or Office Supplies which are being used in the business to conduct daily operations to generate revenue.

    6. Prepaid Assets – examples are Prepaid Insurance and Prepaid Rent, which arises out of paying in advance a future expense that, will be incurred.

    7. Equipment – assets that have a life of longer than one (1) year and have been purchased to help operate the business and generate the revenue.

  2. Liabilities – are obligations or debts owed by the business entity. They are obligations that will have to be paid within one year or over a year to creditors. They may be evidenced by accounts or notes used as collaterals for the obligations. The sub-classification of the Liability category is discussed in Chapter 5. Most liabilities have the last name “Payable” to distinguish its nature of obligation. The first name of the Payable will determine the nature of the transaction.

  3. Owner’s Equity – is the net worth of the business entity. It is the value of a right or financial interest in the asset or assets of the business entity. The Owner’s Capital account represents the investment of the owner, whether in cash or non-cash. The Owner’s drawing account represents the asset withdrawal of the owner, whether in cash or non-cash.

  4. Revenue – is the income generated in the rendering of service or the selling of merchandise of the business entity. The most common examples relate to the kind of business. For a service business, Professional Fees is used in the Practice Set. For a merchandising concern, the Sales Revenue is used.

  5. Expenses – are the ordinary, necessary, and legitimate costs incurred to generate the revenue. The last name “Expense” must be used to identify an item as an expense. The first name will determine the nature of the transaction for which the expense was incurred. Normally, the lists of the Expense accounts are in numerical order found in the Chart of Accounts. This makes it easier to locate a particular expense item from the list.

Chart of Accounts

TThis is an official list of account names to be used in recording business transactions based on the kind and nature of the business entity. Below is the Chart of Accounts for an example problem, Your Name, M.D., a medical practice. To distinguish each student’s assignment, please use Your Name as the owner or company’s name.

Your Name, M.D.
Chart of Accounts
Year
 

 
ASSETS

 
Account No. Account Names Type

Sage 50 G.A.A.P.
1001 Cash Cash Current Assets
1005 Petty Cash Cash Current Assets
1010 Accounts Receivable Accounts Receivable Current Assets
1015 Medical Supplies Other Current Assets Current Assets
1020 Office Supplies Other Current Assets Current Assets
1025 Prepaid Insurance Other Current Assets Current Assets
1030 Medical Equipment Fixed Assets Fixed Assets
1030.5 Accumulated Depreciation, Med. Eqpt. Accumulated Depreciation Contra Account
1035 Office Equipment Fixed Assets Fixed Assets
1035.5 Accumulated Depreciation, Off. Eqpt. Accumulated Depreciation Contra Account
1040 Furniture & Fixture Fixed Assets Fixed Assets
1040.5 Accumulated Depreciation, Furn. & Fixt. Accumulated Depreciation Contra Account
       
LIABILITIES      
2001 Accounts Payable Accounts Payable Current Liabilities
2005 Wages Payable Other Current Liabilities Current Liabilities
2010 Unearned Revenue Other Current Liabilities Current Liabilities
2015 Interest Payable Other Current Liabilities Current Liabilities
2020 Notes Payable Long-Term Liabilities Long-Term Liabilities
       
OWNER'S EQUITY      
3001 Your Name, Capital Equity—Doesn't Close Equity
3002 Your Name, Draw Equity—Gets Closed Equity
3005 Retained Earnings** Equity—Retained Earnings Equity
       
REVENUE OR INCOME      
4001 Professional Fees Income Revenue or Income
4005 Interest Income Income Revenue or Income
       
EXPENSES      
5010 Bank Service Charge Expense Expenses Expense
5015 Depreciation Expense, Med. Eqpt.* Expenses Expense
5016 Depreciation Expense, Off. Eqpt.* Expenses Expense
5017 Depreciation Expense, Furn. & Fixt.* Expenses Expense
5025 Insurance Expense* Expenses Expense
5030 Interest Expense Expenses Expense
5035 Licenses & Permits Expense Expenses Expense
5040 Postage & Delivery Expense Expenses Expense
5045 Rent Expense Expenses Expense
5050 Repairs Expense Expenses Expense
5055 Supplies Expense—Medical* Expenses Expense
5060 Supplies Expense—Office* Expenses Expense
5065 Telephone Expense Expenses Expense
5070 Utilities Expense Expenses Expense
5075 Wages Expense Expenses Expense

*These accounts will be further discussed in Chapter 3.

**Sage 50 uses Retained Earnings account in all types of business organization. Though manual accounting uses Retained Earnings account only in relation to corporations, computerized accounting software uses Retained Earnings in all types of business organization as an accumulated earnings amount carried forward from period to period.

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