FABM-1 Module 3 Accounting Equation

Fundamentals of Accountancy, Business and
Governor Pack Road, Baguio City, Philippines 2600 Management 1

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 11- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph
MODULE 3 – FABM 1 Subject Teacher: Kenny Jones A. Amlos
THE BOOKS OF ACCOUNTS & ACCOUNTING EQUATION

Learning Objectives:
At the end of this module, learners must be able to:
a. explain the different types of book of accounts;
b. illustrate the accounting equation;
c. perform operations involving simple cases with the use of accounting equation.
Books of Accounts
The books of accounts are also called accounting books. It is where transactions that the business
enters into and events that affect the business are recorded.
Types of book of accounts:

1. Journal (book of original entry) – Used in recording daily transactions of the business. The accounts
affected by transactions or events are determined. These effects on the accounts
(increase/decrease) are recorded in the journals as debit and credit.
Types of journals:
A. General Journal- for the recording of transactions that cannot be recorded in the special
journals
B. Special Journals/ Subsidiary Journals- used to record specific repetitive and voluminous
transactions of the business.
a. Cash receipt journal- for cash receipts only
b. Sales journal-for sales made on credit
c. Sales return journal- for recording bad orders from customers or goods returned
d. Purchase journal
e. Purchase return journal- for recording bad orders from suppliers
f. Cash disbursement journal- records only payment of cash.
2. Ledgers (book of final entry) – the ledger classifies transactions in the journal to their respective
accounts. The entries in the journals are transferred and classified on a per-account basis in order
to compute for the ending balances of each account to be reported. This transferring is called
“Posting”.
Types of Ledgers:
A. General Ledger
B. Subsidiary Ledger- contains the details of an account such as information regarding customers
and suppliers.
The journal is called “book of original entry” because it serves as the first record of transactions. The
Ledgers are called “books of final entry” because journal entries are transferred to the ledgers for
classification and summarization.
The Basic Accounting Equation

All the processes in an accounting system must observe the equality of the accounting equation,
which is basically an algebraic equation as shown below:
ASSETS = LIABILITIES + EQUITY*

*Equity can be interchangeably changed with CAPITAL
++
Refer to module 5 for the discussion on the Elements of Financial Statements.
In applying the basic accounting equation, you must always bear in mind that in every accounting
transaction, the amount of Assets should still be equal to Liabilities plus Capital.
Fundamentals of Accountancy, Business & Management - 1 Page 1 of 5

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
Illustration # 1: Note that “( )” sign means decrease.

EFFECTS ON
Capital
Transactions (is affected by
Assets Liabilities
Revenue ↑, and by
Expense ↓ accounts
1. Investment of P50,000 by Engr.
Juan Dela Cruz to his newly Cash ₱20,000;
established business: Furniture and
Fixtures ₱25,000; JDC, Capital ₱50,000
Cash ₱20,000 Office Equipment
Office furniture of ₱25,000 ₱5,000
Office Equipment of ₱5,000
2. Hired a secretary. Per Hiring is not a valid accounting transaction since there is only
agreement, the secretary would an agreement between two parties but there is no monetary
receive a monthly salary of transaction involved because there is no payment of salary
₱6,500. yet.
3. Bought a computer on Office Equipment Accounts Payable
account, ₱18,000 ₱18,000 ₱18,000
4. Paid half of the account to the Accounts Payable
Cash (₱9,000)
supplier of the computer. (₱9,000)
Accounts
5. Billed a client for services Service revenue
Receivable
rendered ₱20,000. ₱20,000
₱20,000
Cash ₱15,000;
6. Collected ₱15,000 of the Accounts
account in #5. Receivable
(₱15,000)
7. Paid business taxes, ₱500 for Taxes and licenses
Cash (₱500)
cash. ₱500 (E)
8. Paid rent for the office, ₱5,000 rent expense ₱5,000
Cash (₱5,000)
for cash. (E)
furniture and
9. Bought for cash a filing cabinet,
fixtures ₱3,500;
₱3,500
Cash (₱3,500)
Notes payable
10. Issued a note to settle the
₱9,000;
balance of the account to the
Accounts Payable
supplier of the computer.
(₱9,000)
Cash ₱5,000;
11. Collected the balance of the Accounts
account in #6. Receivable
(₱5,000)
12. Engr. Juan dela Cruz withdrew JDC, drawings
Cash (₱7,000)
₱7,000 for his personal use. ₱7,000 (W)
13. Paid electric bills of the business, Utilities expense
Cash (₱1,200)
₱1,200 for cash. ₱1,200 (E)

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
14. Paid ₱800 for electric bills of the

residence of Engr. Regua (to
Cash (₱800);
accommodate him as he was
Accounts
out of town to personally pay for
Receivable ₱800
the bills. Engr. Regua would pay
back the business)
15. Billed another client for services
rendered, ₱15,000. Immediately,
Notes Receivable Service Revenue
the client issued a promissory
₱15,000 ₱15,000
note for the same amount to
the business.
₱80,300 ₱9,000 ₱71,300
Assets = Liabilities + Capital
₱80,300 = ₱9,000 + 71,300
₱80,300 =₱80,300
No matter how many transactions will be given to you, make sure that the total of your ASSETS should
be equal to the LIABILITIES AND CAPITAL combined.
The Expanded Accounting Equation

We can expand the Basic Accounting Equation b including two more elements- Revenue and
Expenses, which are included in the “Capital” in the Basic Accounting Equation.
ASSETS=LIABILITIES + [EQUITY+ (REVENUE-EXPENSES)]

*Equity can be replaced with CAPITAL
**Revenue can be replaced with Income
++
Notice that Revenue is added while expenses are deducted in the expanded accounting equation.
These are because income increases Capital while Expense decreases Capital. Let us apply the
Expanded Accounting Equation below using the same illustration used for the Basic Accounting
Equation. Notice how the amount of the Assets and Liabilities remain the same. In Expanded
Accounting Equation, you are just distributing the Capital into Capital, Revenue, and Expenses.
However, the total of ASSETS should still be equal to the CAPITAL plus REVENUE minus EXPENSES.
Illustration # 2: Note that “( )” sign means decrease.

EFFECTS ON
Transactions Revenue/
Assets Liabilities Capital Expense
Income
1. Investment of ₱50,000 by Cash ₱20,000; JDC,
Engr. Juan Dela Cruz to Furniture and Capital
his newly established Fixtures ₱50,000
business: ₱25,000; Office
Equipment
₱5,000
Cash ₱20,000
Office furniture of ₱25,000
Office Equipment of ₱5,000
2. Bought a computer on office Accounts
account, ₱18,000 equipment Payable
₱18,000 ₱18,000

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
3. Paid half of the account Cash (₱9,000) Accounts

to the supplier of the Payable
computer. (₱9,000)
4. Billed a client for services Accounts Service
rendered ₱20,000. Receivable revenue
₱20,000 ₱20,000
5. Collected ₱15,000 of the Cash ₱15,000;
account in #5. Accounts
Receivable
(₱15,000)
6. Paid business taxes, ₱500. Cash (₱500) Taxes
and
licenses
₱500 (E)
7. Paid rent for the office, Cash (₱5,000) rent
₱5,000. expense
₱5,000 (E)
8. Bought for cash a filing Furniture and

cabinet, ₱3,500 Fixtures ₱3,500;
Cash (₱3,500)
9. Issued a note to settle the Notes
balance of the account payable
to the supplier of the ₱9,000;
computer. Accounts
Payable
(₱9,000)
10. Collected the balance of Cash ₱5,000;
the account in #6. Accounts
Receivable
(₱5,000)
11. Engr. Juan dela Cruz Cash (₱7,000) JDC,
withdrew ₱7,000 for his drawings
personal use. (₱7,000)(W)
12. Paid electric bills of the Cash (₱1,200) Utilities

business, ₱1,200. expense
₱1,200 (E)
13. Paid ₱800 for electric bills Cash (₱800);

of the residence of Engr. Accounts
Regua (to accommodate Receivable
him as he was out of town ₱800
to personally pay for the
bills. Engr. Regua would
pay back the business)
14. Billed another client for Notes Service

services rendered, Receivable Revenue
₱15,000. Immediately, the ₱15,000 ₱15,000
client issued a promissory
note for the same amount
to the business.
TOTAL ₱80,300 ₱9,000 ₱43,000 ₱35,000 ₱6,700

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
ASSETS = LIABILIITES + [CAPITAL + (REVENUE – EXPENSES)]

₱80,300 = ₱9,000 + [₱43,000 + (₱35,000 - ₱6,700)]
₱80,300 = ₱80,300
References:
• Banggawan, R., Asuncion, D.(2017).Fundamentals of Accountancy, Business and
Management 1. Aurora Hill, Baguio City: Real Excellence Publishing.
• Ferrer, R., Millan, Z.(2017). Fundamentals of Accountancy, Business and Management 1.
Bakakeng Sur, Baguio City: Bandolin Enterprise.
Other References you may use:

• Ong, F.(2016). Fundamentals of Accountancy, Business and Management 1. South Triangle,
Quezon City: C & E Publishing.
• Baysa, G., Lupisan, M.(2011). Accounting for Partnership and Corporation. Mandaluyong City:
Millenium books,

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Fundamentals of Accountancy, Business and

Governor Pack Road, Baguio City, Philippines 2600 Management 1

MODULE 3 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

THE BOOKS OF ACCOUNTS & ACCOUNTING EQUATION

Types of book of accounts:

The Basic Accounting Equation

ASSETS = LIABILITIES + EQUITY*

Fundamentals of Accountancy, Business & Management - 1 Page 1 of 5

MODULE 3 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

Illustration # 1: Note that “( )” sign means decrease.

Fundamentals of Accountancy, Business & Management - 1 Page 2 of 5

MODULE 3 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

14. Paid ₱800 for electric bills of the

The Expanded Accounting Equation

ASSETS=LIABILITIES + [EQUITY+ (REVENUE-EXPENSES)]

Illustration # 2: Note that “( )” sign means decrease.

Fundamentals of Accountancy, Business & Management - 1 Page 3 of 5

MODULE 3 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

3. Paid half of the account Cash (₱9,000) Accounts

8. Bought for cash a filing Furniture and

12. Paid electric bills of the Cash (₱1,200) Utilities

13. Paid ₱800 for electric bills Cash (₱800);

14. Billed another client for Notes Service

Fundamentals of Accountancy, Business & Management - 1 Page 4 of 5

MODULE 3 – FABM 1 Subject Teacher: Kenny Jones A. Amlos

ASSETS = LIABILIITES + [CAPITAL + (REVENUE – EXPENSES)]

Other References you may use:

Fundamentals of Accountancy, Business & Management - 1 Page 5 of 5

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