Fundamentals of

Accountancy, Business
and Management 1
Quarter 3 – Module 3:
Accounting Equation
 What I Need to Know

This module was designed and written so that you will learn the basic tool of
accounting equation. It will also help you learn to solve problems by applying the
basic accounting equation (ABM_FABM11-IIIc-17-18).

At the end of this module, you are expected to:

a. illustrate the accounting equation and

b. perform operations involving simple cases with the use of accounting

equation.

1
 What I Know

Directions: Read the statement carefully and write TRUE if the statement is correct
and FALSE if not. Write your answers on a separate sheet of paper.

____________ 1. Accounting equation has two (2) sides.

____________ 2. Asset is equal to the total of liabilities and owner's equity.

____________ 3. Assets, liabilities, and owner’s equity are the components of the
accounting equation.

____________ 4. Assets are the resources borrowed by the owner.

____________ 5. If the business has liabilities it has obligations.

____________ 6. There are three (3) elements that affect equity account.

____________ 7. Investments affect the owner's equity account.

____________ 8.Assets and liabilities increase when the business purchases supplies
on account.

____________9. There is an increase in liability when you buy equipment on account.

___________10. If there is Php 500,000.00 worth of assets and Php 200,000.00 worth
of liabilities, then there is Php 300,000.00 worth of
owner's equity.

2
 Lesson
Accounting Equation
1
Formulas and equations are important to solve a
certain mathematical problem not only in the fields of
Mathematics and Science but also in Accounting. Its
equation has two sides - the left and the right side. The
left side of the equation is the company’s assets and the
liabilities and equity are shown on the right side.

The accounting equation is composed of asset, liabilities, and owner's equity.

The asset is the sum of liabilities and owner's equity, while liability is the difference
after the owner’s equity is deducted to asset. Equity is the money that is bought by
owners of the company for running the business . There is also an extended
accounting equation where revenue and expenses are added.

Accounting equation is the foundation of other accounting formulas. This helps

one avoid confusions on computing assets, liabilities, or owner's equity.

What’s In

Directions: Analyze the problem carefully and answer the questions that follow.
Write your answers on a separate sheet of paper.

Hannah Mae Vista graduated as summa cum laude with the degree of B.S.
Accountancy and got her job through her brother’s recommendation. She has served
as an accountant on Vista Accounting Firm for three years. She has been very
passionate about her work since it was her dream to be an accountant. One day,
when she was doing the financial reports of the company, she noticed that the debit
and the credit sides were not balanced. She kept finding the errors but found none.
Unexpectedly, Hannah’s boss approached and told her that he got cash amounting
to Php 100,000.00 for personal use but he refused to record it as drawings or
withdrawals. Her boss wanted to record the Php 100,000.00 as expenses even though
it was used for his personal obligations.

3
 Questions:

1. What is/are the principle/s being violated in the problem presented?

2. Is it a right decision for Hannah to record the supposed to be drawings as

expenses? Justify your answer.

Notes to the Teacher

This module prepares students to solve problems by using the
accounting equation.

Rubrics

Exemplary Good Poor

5pts. 3pts. 1pt.

Quality of Information clearly Information Information has

Information relates to the main somehow clearly little or nothing to
topic and add new relates to the main do with the main
concepts. topic. topic.

Critical Thinking It enhances the Some critical It does not answer

critical thinking thinking and the question/s.
process reflection is
consistently demonstrated.
through reflection.

4
 What’s New

Directions: Compute the missing amount in the equation. Write your answers on
a separate sheet of paper.

Assets Liabilities Owner's equity

1. ? Php 100,000.00 Php 50,000.00
2. Php 230,000.00 ? Php 200,000.00
3. Php 109,000.00 Php 9,000.00 ?
4. Php 650,000.00 ? Php 500,000.00
5. ? Php 90,000.00 Php 700,000.00
6. Php 456,000.00 Php 67,000.00 ?
7. Php 2,716,217.00 ? Php 1,729,000.00
8. Php 729,879.00 Php 167,000.00 ?
9. ? Php 123,456.00 Php 789,100.00
10. Php 15,676.00 ? Php 13,780.00

What Is It

Remember that accounting equation must be balanced for each transaction. It

means that the asset should be equal to the total of liabilities and owner's equity.
The formula below shows that the asset is the sum of liabilities and owner's equity.

A = L + OE

The accounting equation consists of three (3) major accounts:

1. Assets are the items that a company owns that can provide future economic
benefit. Assets are valuable resources controlled by the company. Examples of
assets are cash, supplies, accounts receivable, and more.

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2. Liabilities are the financial obligation of a company that results in the company’s
future sacrifices of economic benefits to other businesses. Some of its examples
are loans and accounts payable.

3. Equity is the money that is bought by owners of the company for running the
business. It is the residual interest of the owners which means any asset left
after paying liabilities is the right of the owner of the business.

Four elements that affect equity:

a. Investment is an asset or item acquired with the goal of generating income

or appreciation.

b. Withdrawal occurs when funds are removed from an account for personal
use.
c. Revenue is the total amount of income generated by the sale of goods or
services related to the company’s primary operations.

d. Expenses is the cost of operations that a company incurs to generate

revenue.

To maintain this equation, transactions affecting financial position accounts may

have the following effects:

• Increase in Assets = Increase in Owner’s Equity

Example: Calma started his new business by depositing Php 350,000.00 in a
bank account in the name of Calma Graphics Design at Masa Bank.

• Increase in Assets = Increase in Liabilities

Example: Calma acquired computer equipment by issuing a Php 40,000.00
note payable to Microsoft Office Systems. The note is due in six months.

• Increase in one Asset = Decrease in another Asset

Example: Calma paid Php 10,000.00 to El Grande Suites for rent on the
office studio for the months of June, July, and August.

• Decrease in Assets = Decrease in Liabilities

Example: Calma partially paid Php 15,000.00 for the purchase of computer
supplies on account.

• Decrease in Assets = Decrease in Owner’s Equity

Example: Calma paid Php 5,000.00 to Bills Express for the semi-monthly
utilities.

• Increase in Liabilities = Decrease in Owner’s Equity

Example: Yola Company billed Calma for Php 25,000.00 for the ads. Calma
will pay next month.

6
 Here are the examples where you will see the effects of every transaction to the
major accounts.

Assets invested by the owner

July 1 – Sandy Dela Cruz started a catering service on July 1, 2020. She invested
Php 800,000.00 cash and car amounting to Php 200,000.00 which both
happened in the month of July.

Assets Liabilities Owner's Equity

Cash Dela Cruz, Capital
Php 800,000.00 Php 1,000,000.00
+ +
Car
Php 200,000.00
+

Borrowings from the bank

July 2 – Sandy Dela Cruz borrowed Php 100,000.00 cash from Matagumpay
Bank for her business.
Assets Liabilities Owner's Equity
Cash Loans Payable
Php 100,000.00 Php 100,000.00
+ +

The asset purchased for cash

July 7 – Sandy bought tables and chairs from Matibay Furnitures and paid

Php 45,000.00 cash.

Assets Liabilities Owner's Equity

Cash
Php 45,000.00
(-)
Furniture
Php 45,000.00
+

Assets purchased on account

July 15 – Various equipment were purchased on account from Masigasig

Trucking Services for Php 55,000.00.
Assets Liabilities Owner's Equity
Equipment Php Accounts
55,000.00 Payable
+ Php 55,000.00
+

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 Cash withdrawal by the owner
July 18 – Sandy Dela Cruz made a withdrawal of Php 5,000 for her personal use.

Assets Liabilities Owner's Equity

Cash Dela Cruz,
Php 5,000.00 Drawings
(-) Php (5,000.00)
(-)

Payment of liability
July 20 – The account due to Masigasig Trucking Services was paid in cash.

Assets Liabilities Owner's Equity

Cash Accounts
Php 55,000.00 Payable
(-) Php 55,000.00
(-)

The table summarizes the effects of these transactions on the accounting equation:

Date Assets

July Cash Car Furniture Equipment

1 Php 800,000.00 Php 200,000.00

2 Php 100,000.00
7 Php (45,000.00) Php 45,000.00
15 Php 55,000.00
18 Php (5,000.00)

20 Php (55,000)
Balances Php 795,000.00 Php 200,000.00 Php 45,000.00 Php 55,000.00
Total Php 1,095,000.00
Balance

Date Liabilities Owner’s Equity

Accounts
July Payable Loans Dela Cruz Capital Other Account Title
Payable
1 Php 1,000,000.00
2 Php 100,000.00

7
15 Php 55,000.00
18 (Php5,000.00) Dela Cruz Drawings

20 (Php 55,000.00)
Balances Php 100,000.00 Php 0.00 Php 995,000.00

Total Balance Php 1,095,000.00

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Received cash for revenue earned

July 21 – Sandy Dela Cruz’s catering service was hired and Php 15,000.00 cash
was received from the customers.

Assets Liabilities Owner's Equity

Cash
Service Revenue
Php 15,000.00
Php 15,000.00
+
+

Paid cash for expenses incurred

July 22 – Gas and oil worth Php 500.00, and car repairs worth Php 1,000.00
were paid in a cash transaction.

Assets Liabilities Owner's Equity

Cash Gas & Oil
Php (1,500.00) Php (500.00)
(-) Repair Exp.
Php (1,000.00)
(-)

Revenue rendered on account

July 24 – Dela Cruz’s catering service was hired again by a customer but this time,
the customer was not able to pay Dela Cruz on that day. Instead, she made a
promise to pay Php 16,000.00 on July 31 and August 15.

Assets Liabilities Owner's Equity

Accounts
Service Revenue
Receivable
Php 16,000.00
Php 16,000.00
+
+

Paid for expenses incurred

July 25 – Dela Cruz paid Php 500.00 for the telephone bill.
Owner's
Assets Liabilities
Equity
Telephone
Cash
expense
Php
Php
(500.00)
(500.00)
(-)
(-)

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Revenue earned with a down payment, balance on the account

July 27 – Another customer hired the catering service of Dela Cruz and received a
bill amounting to Php 20,000.00 and 50% of it was collected.

Assets Liabilities Owner's Equity

Cash Service Revenue
Php 10,000.00 Php 20,000.00
+ +
Accounts
Receivable
Php 10,000.00
+

Customer’s account collected in cash

July 30 – The customer on July 24 paid 50% of his account in cash.

Assets Liabilities Owner's Equity

Cash
Php 8,000.00
+
Accounts
Receivable Php
(8,000.00)
(-)

Paid cash for expenses incurred

July 31 – Sandy Dela Cruz paid Php 10,000.00 for rental of office space, and
salaries of Php 9,000.00.
Assets Liabilities Owner's Equity
Cash
Php Salaries Expense
(19,000.00) Php (9,000.00)
(-) (-)

Rent Expense Php

(10,000.00)
(-)

10
 The table summarizes the effects of these transactions on the accounting
equation, (increase or decrease in each account).

Sandy Dela Cruz’s Catering Service

Financial Transaction Worksheet
Month of July, 2020

Date Assets ( in Php ) Liabilities ( in Php ) Owner’s Equity

Accounts Other
Receivable Accounts Aguinaldo,
July Cash Car Furnitures Equipment Loans Payable
Payable Capital
Account
Title
1 P 800,000.00 P 200,000.00 P 1,000,000.00

2 P 100,000.00 P 100,000.00

7 P (45,000.00) P 45,000.00

15 P 55,000.00 P 55,000.00

18 Dela Cruz,
P (5,000.00) P (5,000.00) Drawings

20 P (55,000.00) P (55,000.00)
Service
21 P 15,000.00 P 15,000.00 Revenue

22 Gas and Oil

P (500.00) P (500.00)

Repair
P (1,000.00) P (1,000.00) Expense

24 P 16,000.00 Service
P 16,000.00 Revenue

25 Telephone
P (500.00) P (500.00)
Expense

27 P 10,000.00 Service
P 10,000.00 P 20,000.00 Revenue

30 P 8,000.00 (8,000.00)

31 Rent Expense
P (10,000.00) P (10,000.00)

Salaries
P (9,000.00) P (9,000.00) Expense

Bal. P 807,000.00 P 200,000.00 P 45,000.00 P 55,000.00 P 18,000.00 P 100,000.00 P 0.00 P 1,025,000.00

TOTAL BALANCES P 1,125,000.00 P 1,125,000.00

11
 What’s More

Directions: For each transaction, tell whether the assets, liabilities, and equity will
increase, decrease, or have no effect. Write + for increase, (-) for
decrease, and NE for no effect. Write your answers on a separate sheet
of paper.

Assets Liabilities Owner's Equity

1. The owner invested
cash in the business.
2. The owner withdrew
cash for personal use.

3. The company
received cash from a
bank loan.
4. The company paid
the bank loan.
5. The company
purchased supplies on
a cash basis.
6. The owner
contributed her
personal computer to
the business.
7. The company
purchased equipment
on account.
8. The company
purchased a piece of
land with a down
payment and signed
note.
9. The owner bought
furniture for the
business on account.
10. The company
repaid its suppliers.

12
 What I Have Learned

Directions: Compute the amount of the missing element of financial position

(A= L+OE). Write your answers on a separate sheet of paper.

1. Del Mundo Corporation has assets of Php 500,000.00 and an owner’s

equity of Php 340,000.00.

2. Hernandez Cooperative has liabilities of Php 400,000.00 and an

owner’s equity of Php 320,000.00.

3. Valdez Plumbing Services has assets of Php 234,000.00 and liabilities

of Php 100,000.00.

4. Marta’s First Eatery has liabilities of Php 180,000.00 and an owner’s

equity of Php 230,300.00.

5. Paway Hub has assets of Php 892,000.00 and liabilities of

Php 190,000.00.

6. Golden Corporation has assets of Php 120,000.00 and liabilities of

Php 20,000.00.

7. Tessie’s Store has liabilities of Php 8,000.00 and an owner’s equity of

Php 12,000.00.

8. De Guzman Merchandise has assets of Php 500,000.00 and an

owner’s equity of Php 390,500.00.

9. Marziano Cooperative has liabilities of Php 90,000.00 and an owner’s

equity of Php 240,000.00.

10. Pearl Trading Enterprise has assets of Php 800,500.00 and liabilities
of Php 450,000.00.

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 What I Can Do

Directions: Analyze the transactions of Kim as the owner of Chinita Girl Spa
Services. Record the transactions using a financial transaction
worksheet indicated on the next page. Write your answers on a
separate sheet of paper.

June 1 Kim invested Php 500,000.00 cash and equipment amounting to

Php100,000.00 to open Chinita Girl Spa.

2 She borrowed Php 50,000.00 cash from Bamba Bank to be

used for her business.

7 She bought tables and chairs from Maginhawa Furnitures and

paid Php 20,000.00 cash.

15 Various equipment were purchased on account from Beauty

Shoppy for Php 50,000.00.

18 She made a withdrawal of Php 10,000.00 for her personal use.

20 The account due to Beauty Shoppy was paid in cash.

21 Chinita Girl Spa Services was hired. The cash of Php 10,000.00
was received from the customer.

22 Gas and oil worth Php 1,000.00 and equipment repairs worth
Php 1,000.00 were paid in a cash transaction.

24 Service was hired again by a customer for Php 15,000.00 but

this time the customer was only able to pay Kim 50% on that
day and she made a promise to pay the other 50% on June 30.

25 She paid Php 1,000.00 for the telephone bill.

27 Another customer hired the services of Chinita Girl Spa Services.

A bill was issued to them for Php 30,000.00 and 50% of it was
collected.

30 The remaining balance on the transaction last June 24 was

paid in cash.

30 She paid Php 5,000.00 for the office rental space and Php
4,000.00 for employees’ salaries.

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 Chinita Girl Spa Services
Financial Transaction Worksheet
Month of June, 2020

OWNER’S
Date ASSETS LIABILITIES
EQUITY
Accounts Other
Loans Accounts Kim,
June Cash Furnitures Equipment Receivable Account
Payable Payable Capital Title
1
2
7
15
18

20
21
22

24

25

27

30
30

Bal.
Total
Balances

15
 Assessment

Directions: Answer the questions that follow. Write the letter of your answers on
a separate sheet of paper.

1. Which is the accounting equation?

A. assets= liabilities + owner’s equity
B. liabilities = assets + owner’s equity
C. owner’s equity = assets + liabilities
D. assets = revenue - expenses

2. What are the resources owned by the owners?

A. expenses
B. liabilities
C. revenues
D. assets

3. Which term refers to the obligations of the business?

A. liabilities
B. assets
C. revenues
D. owner’s equity

4. Which refers to the remaining amount of the assets after paying all the
company’s liabilities?
A. revenues
B. owner’s equity
C. expenses
D. net profits

5. What does an extended accounting equation include?

A. revenues and expenses
B. revenues and assets
C. expenses and liabilities
D. none of the above

6. When the owner invested cash on the business, what account/s

increase/s?
A. assets and owner's equity
B. assets only
C. liabilities and assets
D. owner's equity only
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7. Is there an effect on the assets account when the owner withdraws
cash for personal use?
A. Yes, it decreases.
B. Yes, it increases.
C. Yes, it increases and decreases.
D. None of the above

8. What would be the effect to the liabilities of the business after availing
loan from Panata Bank?
A. It remains the same.
B. It decreases.
C. It increases.
D. None of the above

9. Mr. Kim has assets of Php1,000,000.00 and liabilities of Php 300,000.00

What is his equity?
A. Php 700,000
B. Php 1,300,000
C. Php 800,000
D. 0

10. The liabilities of Senshin’s Shop are Php 450,000 and his equity is
Php 780,000. What is the business' total assets?
A. Php 1,032,000
B. Php 1,320,000
C. Php 1,023,000
D. Php 1,230,000

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 Additional Activities

Directions: Analyze the transactions of Ronald Cabiling Housekeeping Services

during the month of August 2020. Record the transactions using the
financial transaction worksheet. Write your answers on a separate
sheet of paper.

August1 – Mr. Cabiling invested Php 1, 000,000.00 cash for his business.

2– Various equipment were purchased for the business amounting

to Php 100,000.00

4– Cabiling Housekeeping Services was hired by a customer and

they received a payment of Php 5, 000.00.

5– Cabiling paid Php 3,000.00 for the salary of the employees.

7– Another customer hired the service of Cabiling Housekeeping. A

bill was issued to them for Php 10,000.00 of which 90% was
collected.

13 – Cabiling paid Php 2,000.00 for the telephone bill.

21 – Cabiling invested again the amount of Php 50,000 in the

business.

25 – The account on August 7 was finally collected in full.

28 – The De Guzman family hired Cabiling Housekeeping Services to

clean their mansion amounting to Php 20,000.00. The family
paid the amount of Php 5,000.00 and the balance will be paid
on August 30.

30 – Cabiling collected the balance from De Guzman family.

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 19
Assessment
1. A 6. A
2. D 7. A
3. A 8. C
4. B 9. A
5. A 10. D
Additional Activities
Ronald Cabiling Housekeeping Service
Financial Transaction Worksheet
Month of August, 2020
Date ASSETS LIABILITIES OWNER’S EQUITY
Accounts Other
Receivable Cabiling,
August Cash Equipment Account
Capital Title
1
P 1,000,000 P 1,000,000
2 (100,000) P 100,000
4 Service
5,000 5,000 Revenue
5 Salaries
(3,000) (3,000) Expense
7 P 1,000 Service
9,000 10,000 Revenue
13 Telephone
(2,000) (2,000) Expense
21 50,000 50,000
25 (1,000)
1,000
28 15,000 Service
5,000 20,000 Revenue
30 (15,000)
15,000
Bal. 0 0 P 1,080,000
P 980,000 P 100,000
TOTAL BALANCES P 1,080,000
P 1,080,000
Answer Key
 20
What I Have Learned
1. L= Php 160,000 6. OE = Php 100,000
2. A= Php 720,000 7. A= Php 20,000
3. OE= Php 134,000 8. L= Php 109,500
4. A = Php 410,300 9. A= Php 330,000
5. OE = Php 702,000 10. OE= Php 350,500
What Can I Do
Chinita Girl Spa Services
Financial Transaction Worksheet
Month of June, 2020
OWNER’S
Date ASSETS LIABILITIES
EQUITY
Accounts Accoun Other
Receivable Loans Kim,
June Cash Furnitures Equipment ts Account
Payable Capital Title
Payable
1 P 500,000 P 100,000 P 600,000
2 50,000 P 50,000
7 (20,000) P 20,000
15 P 50,000 P 50,000
18 Kim,
(10,000) (10,000)
Drawings
20 (50,000) (50,000)
Service
21 10,000 10,000
Revenue
22 Gas and
(1,000) (1,000)
Oil
Repair
(1,000) (1,000)
Expense
24 P 7,500 Service
7,500 15,000
Revenue
25 Telephone
(1,000) (1,000)
Expense
27 15,000 Service
15,000 30,000
Revenue
30 7,500 (7,500)
31 Rent
(5,000) (5,000)
Expense
Salaries
(4,000) (4,000)
Expense
Bal. P P 15,000
P 498,000 P 20,000 P 50,000 0 P 633,000
150,000
TOTAL BALANCES P 683,000 P 683,000
 What’s New
21
(In Php )
ASSETS LIABILITIES OWNER'S EQUITY
1. 150,000
2. 30,000
3. 100,000
4. 150,000
5. 790,000
6. 389,000
7. 987,217
8. 562,879
9. 912,556
10. 1,896
What’s More
ASSETS LIABILITIES OWNER'S
EQUITY
1. The owner invested cash in the
+ NE +
business.
2. The owner withdrew cash for
- NE -
personal use.
3. The company received cash from a
+ + NE
bank loan.
4. The company paid the bank loan. - - NE
5. The company purchased supplies on
-+ NE NE
a cash basis.
6. The owner contributed her personal
+ NE +
computer to the business.
7. The company purchased equipment
+ + NE
on account.
8. The company purchased a piece of
land with a down payment and signed +- + NE
note.
9. The owner bought furniture for the
+ + NE
business on account.
10. The company repaid its suppliers. - - NE
 22
What I Know
1. True 2. True 3. True 4. False 5. True
6. False 7. True 8. True 9. True 10. True
What’s In
1. Business Entity Principle
2. Yes, Answer may vary