THE ACCOUNTING

EQUATION
 Accounting Equation

ASSETS = LIABILITIES + EQUITY

The economic The obligations, The residual rights

and interest of the
resources owned and debts of the
owner(s). Also called
by the business business the net assets or net
worth

26
 ILLUSTRATION
Using the accounting equation, compute the missing amounts for each of the
following companies:

Company Assets Liabilities Equity

A $ 87.27 ? $ 23.22
B ? $ 62.93 $ 11.20
C $ 9.79 $ 7.66 ?
D $ 18.86 57.74% ?

Which company has the highest net worth?

Page 56. Exercise #1 27

 ILLUSTRATION
Jackson is the owner of a business consulting business. At the end of its accounting period Dec
31, 2018, Go and Change has assets of P1,325,000 and liabilities of P1,142,000. Using the
accounting equation, determine Jackson Capital, as of December 31, 2018.

How much is Jackson, Capital as of December 31, 2019, assuming that assets increased by P
84,000 and liabilities increased by P 47,000 during 2019?

Assets Liabilities Equity

Dec 31, 2018

Change

Dec 31, 2019

Page 56. Exercise #4 28

 ILLUSTRATION

Page 61. Problem #1 29

 ILLUSTRATION

Page 61. Problem #2 30

 ILLUSTRATION
A list of transactions appears below. Indicate which accounting elements of the business are affected by
placing in the respective columns the amount and the + (increase) or – (decrease) sign or NA, if the
element is not affected. April is the owner-manager of April Pizza. Unless otherwise stated, the
transactions are all for the business.

Assets Liabilities Equity

a.) April received a retirement pay of P1,000,000 cash
and invested half of this to put up a business
b.) From the remaining pension of P500,000, she got
a car for her own use, P750,000 and issued a note for
the balance
c.) She hired a cook, a cashier, and a server for a
monthly salary of P10,000 each worker

Page 57. Exercise #11 31

 ILLUSTRATION
Continuation

Assets Liabilities Equity

d.) She bought cooking equipment and paid
P350,000
e.) She bought office equipment from Best Shop for
P120,000 on credit
f.) She paid a third of the account due to Best Shop
g.) She took P5,000 cash and bought supplies

How much is the total assets, liabilities, and equity at the end?

Page 57. Exercise #11 32

 ILLUSTRATION

Page 57. Exercise #7 33

 THE ACCOUNT

The Account is a device used to record the changes (increase or

decrease) in the accounting elements. It is the basic storage of
information in accounting.

There are 5 major accounts.

1. Asset
2. Liabilities Balance Sheet Accounts
3. Equity
a. Income
Income Statement Accounts
b. Expense

Note: for every transaction, at least 2 accounts are affected.

34
 THE ACCOUNT

ASSET ACCOUNTS

a. Cash (cash on hand, cash in bank)

b. Accounts Receivables
c. Notes Receivables
d. Loans Receivables
e. Supplies
f. Furnitures and Fixtures
g. Equipment
h. Machine
i. Land
j. Building

35
 THE ACCOUNT

LIABILITY ACCOUNTS

a. Accounts Payable
b. Notes Payable
c. Loans Payable
d. Mortgage Payable
e. Interest Payable
f. Salaries Payable

36
 THE ACCOUNT

EQUITY ACCOUNTS

a. Owner’s Capital
b. Owner’s drawing/withdrawals

37
 “
Chart of Accounts
A chart of accounts is a listing of the names of the accounts that
a company has identified and made available for recording
transactions in its general ledger. A company has the flexibility to
tailor its chart of accounts to best suit its needs, including adding
accounts as needed.
 ILLUSTRATION
Identify what accounts will be affected by the following transactions:
Account 1 Account 2
1. Invested cash into a business
2. Bought supplies in credit
3. Purchased a machine with cash
4. Paid the credit from #2
5. Owner used the cash of the business to buy food for
their dog

6. Got a loan from a bank

7. Owner contributed a piece of land and furniture

39
 ILLUSTRATION

Page 58. Exercise #14 40

 ILLUSTRATION

ASSETS LIAB EQUITY

Date Cash Supplies Rent F&F Equipment Leasehold Notes De Dios
Deposit Improvement Payable Capital
01
05
10
15
20
25
TOTAL

Page 58. Exercise #14 41

 ILLUSTRATION

Page 58. Exercise #14

ASSETS LIAB EQUITY
Date Cash Supplies Rent F&F Equipment Leasehold Notes De Dios
Deposit Improvement Payable Capital
01
05
10
15
20
25
TOTAL
42
 ILLUSTRATION

Page 58. Exercise #14

ASSETS LIAB EQUITY

Date Cash Supplies Rent F&F Equipment Leasehold Notes De Dios
Deposit Improvement Payable Capital
01
05
10
15
20
25
TOTAL
43