HO 2 – FINACR 030 1

HUA SIONG
COLLEGE OF ILOILO

FINANCIAL ACCOUNTING AND REPORTING ACCOUNTING EQUATION

Every business transaction or accountable event affects the assets, liabilities, and proprietorship or owner’s
equity of the business. These effects can be expressed in the accounting equation:

ASSETS = EQUITIES

Basic Accounting Equation:

Equity is the right, claim, or interest of a person over the assets of the business. Liability or creditor’s equity
represents claims of creditors in the asset of the business and capital or owner’s equity is the owner’s or
owners’ claims in the business. Remember that a business can be classified as to the number of owners of
the business entity. For a sole proprietorship, capital is called “owner’s equity or capital”; for a partnership,
“partner’s capital”, and for a corporation, “Stockholders’ Equity”. Therefore the basic accounting equation is:

ASSETS = LIABILITIES + CAPITAL (OWNER’S EQUITY)

Expanded Accounting Equation:

A business is interested in the items which resulted to the increase or decrease of capital. The capital account
increases by the capital originally invested, additional investment, and revenue or income earned by the
business. The capital account decreases by the withdrawal of the owner and expenses incurred in the
operations of the business. Therefore the expanded accounting equation is:

ASSETS = LIABILITIES + [CAPITAL + INCOME – EXPENSES – DRAWING]

Illustration 1:

Analyze the following transactions. Record the following transactions and the balances after each transaction
using the table. Indicate the nature of each increase or decrease in capital subsequent to the initial investment
by noting at the right side of each change in the capital section.

1. Oct. 1 – Mr. Pedro Gil opened a motor repair shop and invested P 100,000 cash.

2. Oct. 2 – Loaned from the bank, P 20,000 cash.

3. Oct. 2 – Purchased equipment for cash, P 80,000.

4. Oct. 3 – He purchased repair supplies worth P 25,000 on credit/account from De Mesa Trading.

5. Oct. 5 – Received cash from L. Cruz for repair work done on his automobile, P 20,000

6. Oct. 6 – Rendered repair services on account to John Doe, P 30,000.00.

7. Oct. 7 – He bought table and chairs for the business, P 10,000 for cash.

8. Oct. 15 – Paid the salary of the assistant, P 2,000

9. Oct. 17 – Collected P 20,000 cash from John Doe for repair services performed on account.

(Transaction 6)

10. Oct. 20 – Paid De Mesa Trading, P 10,000 for the supplies purchase on account. (Transaction 4)

11. Oct. 29 – Mr. Gil withdrew P 15,000 from the business for his personal use.
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ASSETS = LIABILITIES + CAPITAL

1.

2.

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6.

7.

8.

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11.
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Illustration 2:

Record the transactions of James Tan for the month of June in tabular form.

Transactions:

1. James Tan opened a car repair shop with a cash investment of P 200,000 on June 1, 2010.
2. Rented a space, paying P 20,000 for its use in the month of June
3. Bought supplies for cash, 15,000.
4. Bought tools and equipment from Buena Vista Equipment Corporation, P 60,000. The down payment is
P 10,000, the balance, on account.
5. Performed services to clients for which an amount of P 40,000 was received for cash.
6. Paid wages to helpers in the shop, P 10,000.
7. Paid one-half of the balance of the account to Buena Vista Corporation
8. James Tan spent P 5,000 from the business fund for personal use.
9. Received P 30,000 from clients for services rendered.
10. Paid the following expenses. Water and Electricity – P 5,000; Wages P 15,000.
11. Supplies used amounted to P 5,000.

ASSETS = LIABILITIES + CAPITAL

Cash + Supplies + Tools and = Accounts payable + J. Tan, Capital

Equipment
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Illustration 3:

Candice Great opened a dental clinic. The following are the transactions for the month of October.

1. Invested cash 100,000 and dental equipment P 200,000.

2. Paid three-month rent of the dental office P 15,000.
3. Paid licenses and taxes P 10,000
4. Purchase dental supplies for cash, P 20,000.
5. Purchased dental equipment from a supplier on account P 60,000.
6. Received P 80,000 for dental services rendered during the first half of the month.
7. Paid the salary of the receptionist, P 10,000.
8. Returned defective dental supplies. Received 1,000 as refund. (transaction 4)
9. Sent a bill to Christian Kindergarten School for dental services rendered, P 30,000.
10. Paid Accounts payable, P 10,000.00.
11. Collected P 10,000 Accounts Receivable from Christian Kindergarten School.
12. Determined at the end of the period that supplies on hand is P 4,000.
13. Record one month expiration of rent.

Instructions:

Record the transactions and the balances after each transaction using the tabular form. Determine the nature
of the increase or decrease in capital after the initial investment noting at the right side of each change in the
capital section.

ASSETS = LIABILITY + CAPITAL

Cash + Accounts + Dental + Prepaid + Dental = Accounts + C. Great, capital
Receivable Supplies Rent Equipment Payable
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Illustration 4:

State the effects of the following transactions on the assets, liabilities, and capital by placing (+) if it increase (-)
if it decrease and (0) if it has no effect.

Transactions Assets Liabilities Capital

1. Invested cash and equipment
2. Received cash from customer for services
rendered.

3. Purchased additional equipment on

account/credit.
4. Paid the assistant’s salary
5. Billed a customer for services rendered.
6. Paid the telephone bill.
7. Paid the account due in number 3
8. Purchased supplies for cash.

9. Received payment from customer in number

5.
10. Withdraw cash from the business for personal
use.
11. Rendered repair services on account.
12. Purchased supplies on account.
13. Received cash for services rendered on
account.
14. Collected Accounts Receivable.
15. Paid cash for supplies purchased on account.
16. Paid accounts payable.

Illustration 5

State the effect of each transaction on the accounting equation using the choices in Set A. Place the letter
answer on the space provided before the number in set B.

Set A:

A. Increase in one asset, decrease in another asset

B. Increase in asset, increase in liability
C. Increase in asset, increase in capital
D. Decrease in asset, decrease in liability
E. Decrease in asset, decrease in capital
F. Increase in one liability, decrease in another liability
G. Increase liability, Decrease capital

Set B:

1. Invested land and building to the business.

2. Received cash from customers for services rendered.
3. Purchased bond papers, pens, and other supplies for cash.
4. Received cash from customers on account.
5. Paid 5-month insurance in advance.
6. Invested supplies to the business.
7. Paid salaries to the employees.
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8. Invested merchandise to the business.

9. Borrowed cash from the bank
10. Collected cash for services rendered on account.
11. Collected Accounts receivable
12. Paid suppliers for purchases on account.
13. Paid Accounts payable.
14. Gave a note to creditor for the unpaid balance.
15. Took money from the business fund for personal use.
16. Paid accounts payable to the supplier.
17. Paid in advance rent for 8 months.
18. Record expired rent.
19. Record utilities expense not yet paid.
20. Withdrew cash from the business for family use.
21. Made full payment for the money loaned from the bank.
22. Returned damaged office equipment to the supplier for which he got a refund.
23. Returned damaged office equipment to the unpaid supplier.
24. Performed legal services to clients who promised to pay next month.
25. Purchased supplies on account.

Illustration 6

The following transactions were completed by RC Trucking Services during the first month of operations:

1. The owner, Carlo Reyes invested cash in business.

2. Purchase gasoline, oil and other supplies for cash.
3. Purchased trucks from Tonda Enterprises on account.
4. Received cash for trucking services rendered.
5. Paid for repair of truck.
6. Invested additional cash.
7. Purchased additional supplies for cash.
8. Sent a bill to Risa Honte for trucking services rendered.
9. Purchased office furniture for cash.
10. Obtained loan from Metrobank.
11. Paid for accident insurance of drivers.
12. Received a check from Risa Honte for the transaction number 8.
13. Paid wages of drivers.
14. Paid salaries of office employees.
15. Sent a check to Tonda Enterprises to apply on the account.

Instruction:

Fill up the form provided for.

Col. 2 – Write increase or decrease to show the effect on the accounting elements.
Col. 3 – Write Assets, Liabilities, Capital, Income, or Expense
Col. 4 – Write the appropriate account title.
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Transaction Effects Elements Account Title

Number (Major Account) (Specific Account)
1. Increase Asset Cash
Increase Capital Reyes, capital
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Illustration 7

Using the information in Illustration 5 Set B:

Fill up the form provided for.

Col. 2 – Write increase or decrease to show the effect on the accounting elements.
Col. 3 – Write Assets, Liabilities, Capital, Income, or Expense
Col. 4 – Write the appropriate account title.

Transaction Effects Elements Account Title

Number (Major Account) (Specific Account)
1.

2.

3.

4.

5.
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Transaction Effects Elements Account Title

Number (Major Account) (Specific Account)
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