2.2 Prepare Chart of Accounts

2.2 Prepare Chart of Accounts

Quick Answer: TESDA TR HCS412301 Element 1 — Prepare chart of accounts requires three performance criteria: (1.1) determine the nature of business from client information; (1.2) prepare lists of asset, liability, equity, income, and expense titles per industry practice; and (1.3) prepare an accounting manual per industry practice. Do this before analyzing documents or journalizing.

A chart of accounts (COA) is the controlled vocabulary of the books. If the title is not on the chart (or properly added through the manual’s update process), you should not invent it mid-entry on assessment day. Element 1 exists so every later debit and credit maps to an authorized title.

PC 1.1 — Determine Nature of Business from Client Information

Interview or review client data until you can classify the entity on two axes used throughout the TESDA CBC modules:

Axis A — Industry / activity type

Axis B — Legal / ownership form

Client information means business registration papers, BIR registration context, contracts, opening balances, and management answers—not guesses. Misclassifying a trading firm as a pure service firm omits inventory and cost-of-sales titles; misclassifying a corporation as a sole prop puts “Owner’s Drawings” where Dividends/Retained Earnings belong.

Mini case — classifying before listing

Client: Luzon Home Goods, DTI-registered sole prop, buys household items wholesale and sells retail in Quezon City, no factory.

• Industry: Trading
• Form: Sole proprietorship
• Expect: Cash, AR, Merchandise Inventory, Store Equipment, AP, Luzon Home Goods Capital, Drawings, Sales, Sales Returns, Purchases or COGS (per manual), Rent Expense, Salaries Expense, Utilities Expense, etc.
• Do not open Raw Materials or Share Capital.

PC 1.2 — List Asset, Liability, Equity, Income, and Expense Titles

Prepare five lists (often combined into one coded chart). Industry practice in the Philippines typically uses numeric codes by class.

Illustrative coding structure (service sole prop)

Trading add-ons (examples)

• 1350 Merchandise Inventory
• 4100 Sales
• 4150 Sales Returns and Allowances
• 4200 Sales Discounts
• 5100 Purchases (periodic) or rely on Inventory + Cost of Sales (perpetual)
• 5110 Purchase Returns; 5120 Purchase Discounts; 5130 Freight-In

Manufacturing add-ons (examples)

• Raw Materials Inventory; Work-in-Process Inventory; Finished Goods Inventory
• Direct Labor; Manufacturing Overhead control and detail accounts

Partnership / corporation equity swaps

Replace sole-prop capital/drawings with partner capital/drawings or with Share Capital, Share Premium, Retained Earnings, and Dividends as appropriate. Keep asset/liability/income/expense logic; change the equity block to match legal form.

Listing discipline

1. Complete classes — do not skip equity or expense lists.
2. Industry practice names — use titles a Philippine bookkeeper and assessor recognize (Accounts Receivable, not “Customer IOUs”).
3. One concept, one title — avoid duplicate “Cash” and “Petty Cash” confusion; if both exist, define both in the manual.
4. Leave room in numbering — 1100, 1110, 1120 so new accounts insert cleanly.

PC 1.3 — Prepare the Accounting Manual

The accounting manual turns the COA into an operating rulebook. Per Element 1.3 it must align with industry practice. A practical NC III–level manual usually includes:

1. Entity profile — name, industry type, ownership form, fiscal year, books maintained (general journal + special journals if used).
2. Chart of accounts — codes, titles, normal balances, and brief definitions.
3. Source document policy — which documents support which entry types (preview of Element 2).
4. Journalizing rules — when to use general vs special journals; required explanation style; peso precision.
5. Approval / update log — who may add accounts and how revisions are dated.

Sample account definition excerpt

• 1110 Cash in Bank — Checking account at BDO Account ****1234; debit receipts, credit disbursements; reconcile monthly.
• 4100 Service Income — Credit for services rendered under accrual; support with OR or sales invoice as applicable.
• 3200 Reyes, Drawings — Debit owner withdrawals of cash/goods for personal use; not an operating expense.

Without a manual, two clerks may debit “Miscellaneous Expense” for equipment purchases—destroying financial statement meaning. With a manual, equipment goes to 1400 and the assessor sees intentional control.

Element 1 Workflow You Can Rehearse

1. Gather client information (registration, activity, owners).
2. Classify industry type and entity form.
3. Draft five account lists + codes.
4. Write/update the accounting manual sections for those titles.
5. Freeze the chart for the assessment problem set (or document any allowed additions).
6. Only then move to document analysis and journal entries.

Assessment Pitfalls

• Jumping to journal entries with no COA.
• Using corporation equity titles for a sole prop case (or the reverse).
• Omitting contra-asset or unearned income titles the narrative clearly needs.
• Building a beautiful list but no manual—PC 1.3 is a separate criterion.
• Coding income in the asset series (breaks industry practice and confuses posting).

Connection Forward

Element 2 will force you to select titles from this chart when invoices and receipts arrive. Element 3 will require debit and credit titles in accordance with the chart of accounts. A weak Element 1 guarantees failure on 2 and 3 even if you “know” debits and credits.