FINANCIAL ACCOUNTING

&
REPORTING
(Fundamentals)

Chapter 3: The Accounting Equation (FAR

by: Millan)
 Chapter 3
The Accounting Equation
Learning Objectives
1. Illustrate the accounting equation.
2. Perform operations involving simple cases
with the use of accounting equation.
 The Accounting Equation

Assets = Liabilities + Equity

 Definitions
• ASSETS – are the economic resources you
control that have resulted from past events
and can provide you with economic benefits.
• LIABILITIES – are your present obligations
that have resulted from past events and can
require you to give up economic resources
when settling them.
• EQUITY – is assets minus liabilities.
 The Expanded Accounting Equation

Assets = Liabilities + Equity + Income - Expenses

 Definitions
• INCOME – is increases in economic benefits during the
period in the form of increases in assets, or decreases in
liabilities, that result in increases in equity, excluding
those relating to investments by the business owner.

• EXPENSES – are decreases in economic benefits during

the period in the form of decreases in assets, or
increases in liabilities, that result in decreases in equity,
excluding those relating to distributions to the business
owner.

• The difference between income and expenses represents

profit or loss.
 Applications of the accounting
equation
1. If total assets is ₱10,000 and total liabilities is
₱6,000, how much is the total equity?
2. If total liabilities is ₱5,000 and total equity is
₱4,000, how much is the total assets?
3. If total assets is ₱10,000 and total equity is
₱3,000, how much is the total liabilities?
4. If total income is ₱10,000 and total expenses
are ₱3,000, how much is the profit or loss?
5. If total income is ₱10,000, total expenses are
₱8,000, total liabilities is ₱7,000, and total
equity (before profit or loss) is ₱6,000, how
much is the total assets?
 QUESTIONS????
 REACTIONS!!!!!
END