THE ACCOUNTING EQUATION (Module 5, Camerino,
An obligating event is an event that
D.)
The most basic tool of accounting is the
accounting equation. This equation presents the
resources controlled by the enterprise (assets), the
present obligation of the enterprise (liability), and the
residual interest in the assets (equity). It states that
asset must ALWAYS equal liabilities and owner’s equity.
The basic accounting model is:
Assets = Liabilities + Equity
ELEMENTS OF FINANCIAL STATEMENTS
The major elements of financial statements include:
 Assets
 Liabilities- creditor/nagpapautang
 Equity- owner
 Income
 Expense
Assets
Assets are the resources that the entity control
that have resulted from past events and can provide
you with future economic benefits.
Essential elements in the definition of asset:
a. Control- the entity must have the exclusive right
to enjoy those benefits or it can prevent others
from enjoying those benefits.
b. Past events- the control over a resource have
resulted from past event or transaction.
Therefore, resources for which control is yet to
be obtained in the future do not qualify as asset
in the present. Jan 10X- Feb 15/
c. Future economic benefit- “Future” means that
resource is expected to provide economic
benefits over more than one accounting period.
“Economic benefits” means the potential of the
resource to provide the entity, directly or
indirectly, with cash. May ineexpect na babalik
nap era.
Liability
Liabilities are the entity’s present obligations
that have resulted from past events and can require the
company to give up resources when settling them.
Essential elements in the definition of liability:
a. Present obligation- This means that the entity,
at present, has a responsibility to pay someone
because of an obligating event that has already
transpired.
creates either legal or constructive obligation.
b. Giving up of resources (or Outflow of economic
benefits) - This means that settling an obligation
necessarily would require you to pay cash, to
transfer other non-cash assets, or to render a
service.
Equity
Equity has a residual definition. It is simply
assets minus liabilities. Other terms for equity are
capital, net assets, and net worth. This account is used
to record the original and additional investments of the
owner of the entity. It is increased by the income
earned during the year. On the other hand, Equity is
decreased by withdrawals of the business owner. It is
also reduced by expenses incurred during the year.
THE EXPANDED ACCOUNTING EQUATION
Assets = Liabilities + Equity + Income – Expense
Notice that income is added while expenses are
deducted in the equation. These are because income
increases equity while expenses decrease equity.
Income
Income are increases in economic benefits
during the period in the form of inflows or
enhancements of assets or decreases of liabilities that
result in increases in equity, other than those relating to
investments by the business owners.
Expenses
Expenses are decreases in economic benefits
(cash depreciation) during the period in the form of
outflows or depletions of assets or increases of liabilities
that result in decreases in equity, other than those
relating to distributions to the business owners.
The difference between income and expense
represents profit or loss.
 If Income > Expenses, the difference is profit.
 If Income < Expenses, the difference is loss.
THE FIVE MAJOR ACCOUNTS (Module 9, Camerino, D.)  Land- the lot on which the building of the
business has been constructed or a vacant lot
Statement of Financial Statement of Profit or which is to be used as future plant site. Land is
Position (Balance Sheet) Loss (Income Statement) not depreciable. Property
Accounts Accounts  Building- the structure owned by a business for
Assets Income use in its operation. Plant
Liabilities Expenses  Equipment- consists of various assets such as:
Equity o Machineries and other factory
equipment
COMMON ACCOUNT TITLES o Transportation equipment
o Office equipment
Balance Sheet Accounts
o Computer equipment
o Furniture and fixtures
ASSETS
 Accumulated depreciation- the total amount of
1. Current Assets- are assets that can be realized
depreciation expenses recognized since the
(collected, sold, used up) one year after year-end date.
asset was acquired and made available for use.
Examples:
 Cash- includes money or its equivalent that is
LIABILITIES
readily available for unrestricted use, e.g., cash
1. Current Liabilities- liabilities that fall due (paid,
on hand, cash in bank
recognized as revenue) within one year after
 Accounts receivable- receivables supported by
year-end date.
oral or informal promises to pay. Pinautang
Examples:
 Allowance for bad debts- the aggregate of
 Accounts payable- obligations supported by
estimated losses from uncollectible accounts
oral or informal promises to pay the debtor.
receivable. Another term is “Allowance for
 Interest payable- interest incurred but not
doubtful accounts”. Hindi nagbayad
yet paid. Interest payable arises from
 Notes receivable- receivables supported by
interest-bearing liabilities.
written or formal promises to pay in the form of
 Salaries payable- salaries already earned by
promissory notes
employees but not yet paid by the business.
 Inventory- represents the goods that are held
 Utilities payable- utilities (e.g., electricity,
for sale by a business. For a manufacturing
water, telephone, internet, etc.) already
business, inventory also includes good
used but not yet paid.
undergoing the process of production and raw
 Unearned income- items related to income
materials that will be consumed in the
that was collected in advance before they
production process.
earned. After the earning process is
 Prepaid expenses
completed, these items are transferred to
 Prepaid supplies- represent the cost of unused
income. Product ang income dahil advance
office and other supplies.
payment.
 Prepaid rent- rent paid in advance
 Prepaid insurance- cost of insurance paid in
2. Non-current Liabilities- are liabilities that do
advance
not fall due (paid, recognized as revenue) within
one year after year-end date.
2. Non-current Assets- are assets that cannot be
Examples:
realized (collected, sold, used up) one year after year-
 Notes payable- obligations supported by
end date.
written or formal promises to pay by the
Examples:
debtor in the form of promissory notes.
 Loans payable
  Mortgage payable- bahay na niloan  Utilities expense- represents the cost of utilities
 Bonds payable- pangungutang sa ibang that have been used during the accounting
company period.
 Supplies expense- represents the cost of
EQUITY supplies that have been used during the period.

 Owner’s capital/equity- the residual amount INVESTMENT

after deducting liabilities from asset. The  Investments are contributions made by the
owner’s capital account is: owner. They may be in form of cash or other
non-cash assets (equipment).
Increased by: Decreased by:  Two kinds:
Investments or Withdrawals or  Initial/original investment
contributions by the distributions to the  Additional investment
owners owners
Income or Profit Expenses or Loss WITHDRAWALS
earned by the business incurred by the  Withdrawals are distribution to the owners. It is
business.
made normally for owner’s personal use.

 Owner’s drawings- this account is used to

THE ACCOUNT
record the temporary withdrawals of the owner
An account is the basic storage of information in
during the period.
accounting. It is a record of the increases and decreases
in a specific item of asset, liability, equity, income, or
INCOME STATEMENT ACCOUNTS
expense. The simplest form of the account is known as
the “T” account because of its similarity to the letter
INCOME
“T”.

 Service fees- revenues earned from rendering

Account Title
services (e.g., services of a spa, services of a
beauty salon, etc.)
 Sales- revenues earned from the sale of goods
Left side or Right side or
(e.g., sale of clothes, sale of canned goods)
Debit side Credit side
 Interest income- revenues earned from the
issuance of interest-bearing receivables
 Gains- income earned from the sale of assets Invest/utang nagbayad
(except inventory) or from enhancements of Asset ay nadadagdagan nababawasan ang asset
assets or decreases in liabilities that are not
classified as revenues.
EQUITY = INVESTMENT – W + INCOME - EXPENSES
EXPENSES

 Cost of Sales (Cost of Goods Sold)- represents

the value of inventories that have been sold
during the accounting period.
 Freight-out- represents the seller’s costs of
delivering goods to customers. TRANSPO, GAS
 Salaries expense- represents the salaries
earned by employees for the services they have
rendered during the accounting period.
 Rent expense- represents the rentals that have
been used up during the accounting period.