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.
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.

Rubrics

Exemplary

5pts. Good 3pts. Poor 1pt.

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

Critical Thinking It does not answer the

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

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.

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

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

a.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.
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
Php 800,000.00 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
+

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 Balance Php 1,095,000.00

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

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)
(-)
(-)

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 Php
(19,000.00) (9,000.00)
(-) (-)

Rent Expense Php

(10,000.00)
(-)

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 Receivable Other
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

 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.

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.

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.

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

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

a.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.

a.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.

Chinita Girl Spa Services

Financial Transaction Worksheet
Month of June, 2020

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

20

21
22
 24

25

27

30
30

Bal.
Total
Balances