Accounting Equation

The Basic Accounting Equation

Assets = Liabilities + Owners Equity

(or Capital)

Assets must equal the sum of liabilities and

owner equity
 DEBIT CREDIT

(Left Side) (Right Side)

Assets Liabilities + Owners Equity

 Major Accounts
The major accounts in accounting are
assets, liabilities, owners equity, revenues
and expenses. Though revenues and
expenses are under owners equity
account, they are shown separately
because they are the main income
statement accounts.
 Asset
1. Cash This includes cash on hand (bills, coins, checks,
money orders or bank draft), cash deposited
in bank (savings account or checking account)
and cash fund (petty cash fund, or payroll
fund) which are unrestricted in use.
2. Accounts Receivable
This refers to open accounts which represent the
amount of money owed by the customers to the
business.
3. Notes Receivable
This represents the amount of money owed by
the customer or debtor to the business
evidenced by a promissory note.

4. Inventories
This represent assets held for sale in the
ordinary course of business, in the process of
production for sale or in the form of materials
or supplies to be consumed in the production
process or in rendering services
5. Supplies
This represents supplies which remained
unused at the end of the accounting period

6. Prepaid Rent
This refers to an advance payment made by the
business to cover for future rental payments.
7. Equipment
This represents manual or automated machines
used in the business
8. Furniture and Fixtures
This represents assets such as tables, chairs,
filing cabinets, display racks etc.
9. Building
This refers to physical structure owned and
used by the business to conduct its business
operations
10. Land
This refers to the physical site owned by the
business where the building is situated.
11. Allowance for Doubtful Accounts
This is a contra valuation accounts which refers
to the portion of accounts receivable that is
estimated to be uncollectible at the end of a
particular accounting period.
12. Accumulated Depreciation
This is a contra-valuation account which refers
to the aggregate portion of the total cost of
property, plant and equipment that has been
charged to depreciation expense.
 LIABILITIES
Are present obligations of the entity
arising from past transactions or
events.
1. Accounts Payable
This refers to open accounts which represent
the amount of money owed by the business to
creditors or suppliers

2. Notes Payable
This represents the amount of money owed by
the business to the suppliers or creditor
evidenced by a promissory note
3. Loan Payable
This represents the amount of money
borrowed by the business from a bank or a
lending institution

4. Mortgage payable
This represents the amount of money
borrowed by the business from a bank or a
lending institution which is secured by
collateral.
5. Advances from customers
This represents cash collected by the business
in advance for a service or good that is yet to
be rendered or delivered.
 OWNER’S EQUITY
Contains the net difference between
total assets and total liabilities. It
represents ownership
 REVENUE
Are the earning arising from the main
line of operations of the business.
1. Service Revenue
This refers to the earnings made by any
business that is into rendering services.

2. Interest Income
This represents interest credited by the bank to
the account of the business arising from bank
deposits
3. Sales
This represents the earnings made by any
business that is into selling goods or
merchandise.

4. Professional Fees
This represents the earnings made by
professionals or experts from rendering
services to their clients.
 EXPENSES
Are the costs being incurred by the
business in generating revenues.
1. Utilities Expense
This refers to the costs associated with the
usage of electricity, water and communication
for a particular accounting period.

2. Salaries Expense
Refers to costs incurred associated with the
services rendered normally by permanent and
full time employees who are paid on a regular
basis usually monthly.
3. Wages Expenses
Refers to costs incurred associated with the
services rendered normally by contractual or
temporary employees and workers who are
paid on a hourly rate or based on output.

4. Taxes and Licenses

This represents cost incurred to register the
business to acquire the right to operate and to
settle taxes
5. Cost of Sales
This refers to the cost of merchandise or goods
that were sold during a particular accounting
period

6. SuppliesExpense
This represents to the amount of supplies that
was used during a particular accounting period
7. Doubtful Accounts Expense
This refers to the amount of accounts
receivable that is estimated as uncollectible
and is recognized as an expense in the current
accounting period

8. Depreciation Expense
This represents to the allocated portion of the
cost of property plant and equipment charged
to expense in the current accounting period.
9. Rent Expense
This refers to the amount of accounts cost of
occupying rental property during a reporting
period.
10. Freight - In
This refers to the transportation cost from
supplier to the business.
11. Freight - Out
This refers to the transportation cost from
business to customers.
 CAPITAL ACCOUNT
Owner’s Capital
This refers to the amount / funds raised to
support a particular business.

Owner’s Drawing
The contra owner’s equity account used to
record the current years withdrawals of
business assets by the sole proprietorship for
personal use.
 Accounts and Financial Statement
The statement of Financial Position presents
the assets, liabilities and owners equity of the
business while the Income Statement presents
its revenues and expenses. Because of this
assets, liabilities and owners equity are called
statement of financial position accounts (or real
accounts) and revenues and expenses are called
income statement accounts (or nominal
accounts)
Expanded Accounting Equation

Assets = Liabilities + Equity

+ Revenue

- Expenses

- Withdrawal
 NORMAL BALANCES AND
INCREASES AND DECREASES

It is important that you master the

normal balances of each account
and two or the contra-valuation
accounts discussed
 Normal Increase Decrease
Balance Through Through
+ -

Assets Debit Debit Credit

Liabilities Credit Credit Debit

Owner Equity
• Owners Capital Credit Credit Debit
• Owners Drawing Debit Debit Credit

Revenues Credit Credit Debit

Expenses Debit Debit Credit

 Chart of Account
Account Title Account Code
Cash 101
Accounts Receivable 102
Equipment 103
Supplies 104
Accounts Payable 201
Loan Payable 202
Taxes and Licenses 301
Salaries Expenses 302
Supplies Expense 303
Rent Expense 304
Mr. Velasco’s Capital 401
Mr. Velasco’s Drawing 402
Service Revenue 403