Chapter 2: The Accounting Equation

The Basic Accounting Equation Liabilities are your present obligations

that have resulted from past events and
All the processes in an accounting can require you to give up economic
system must observe the equality of the resources when settling them
accounting equation, which is basically
an algebraic equation. The basic  Legal obligations – arises from
accounting equation is shown below. contracts / arises from
legislation (tax law)
Assets = Liabilities + Equity / Capital  Constructive obligations –
(warranty)

Assets are economic resources you Equity it simply assets minus liabilities.
control that have resulted from past Other terms for equity are capital, net
events and can provide you with assets, and net worth.
economic benefits.

Illustration No.1

You decided to put up a barbeque stand and have estimated that you will be needing
P3,000 as start-up capital. You went to your closet and broke Mr. Piggy bank, which
you have been saving for quite some time now. You only have P1,000.

Assets Liabilities Equity

1,000 0 1,000

After a lengthy negotiation, Mr. Bumbay agreed to lend you P2,000

Assets Liabilities Equity

3,000 2,000 1,000

The Expanded Accounting Equation

Assets = Liabilities + Equity + Income – Expenses

Income is increase in economic

benefits during the period in the form of
increase in assets, or decrease in Expenses are decreases in economic
liabilities, that result in increases in benefits during the period in the form of
equity
decrease in assets, or increase in equity
liabilities, that result in decreases in

The difference between income and expenses represent profit or loss.

Assets = Liabilities + Equity + Profit / - Loss

Illustration No.2

During the Pandemic period, you earned income of P5,000 and expenses of P3,000

Your expanded accounting equation is as follows.

Assets Liability Equity Income Expenses

5,000 2,000 1,000 5,000 3,000

Equity, Beginning 1,000 Equity, Beginning 1,000

Income 5,000 Profit 2,000
Expenses 3,000 Equity, Ending 3,000
Equity, Ending 3,000

Assets Liabilities Equity

5,000 2,000 3,000

Application of Accounting Equations

Case #1. Total Assets If you have a total assets of P2,000 and
If you have a total liabilities of P1,200 liability of P800 how much is your total
and equity of P800 how much are your equity?
total assets? Assets Liability Equity
Assets Liability Equity 2,000 1,200 ?
? 1,200 800
Case #4.1 profit or (loss)
Case #2. Total Liabilities If you have a total income of P5,000
If you have a total assets of P2,000 and and expenses of P2,000, how much is
equity of P800 how much are your total your profit (loss)?
liabilities?
Assets Liability Equity Case #4.2 profit or (loss)
2,000 ? 800 If you have a total income of P6,000
and expenses of P8,000, how much is
Case #3. Total Equity your profit (loss)?

Case #5. Income

If you have a total expenses of P2,000
and a profit of P3,000, how much is
your total income?
Case #6. Expenses
If you have a total income of P5,000
and a profit of P3,000, how much is
your total expenses?
Case #7. Income
You have ending balance of total
assets of P4,800, ending total liabilities
of P1,000 and beginning equity of
P800. If your total expenses for the
period amount to P2,000, how much is
your total income?
Case #8. Expenses
You have ending balance of total
assets of P4,800, ending total liabilities
of P1,000 and beginning equity of
P800. If your total income for the period
amount to P5,000, how much is your
total expenses?
If your beginning equity is P8,000 while
your ending equity is P6,000, how
much is your profit or (loss) for the
period?
Case # 11 ending total assets
You had total assets, liabilities and
equity of P10,000, P7,000 and P3,000,
respectively, at the beginning of the
period. During the period, your total
liabilities decreased by P4,000, while
your profit was P5,000. How much are
your total Assets?
Case # 12 ending total assets
You had total assets, liabilities and
equity of P10,000, P7,000 and P3,000,
respectively, at the beginning of the
period. During the period, your total
liabilities decreased to P4,000, while
your profit was P5,000. How much are
your total Assets?

Case #9. Ending equity

Your beginning equity is P5,000. If your
total income for the period is P8,000
while your total expenses are P6,000,
how much is the ending balance of your
equity?

Case #10. Ending equity

Your beginning equity is P12,000. If
your total income for the period is
P5,000 while your total expenses are
P8,000, how much is the ending
balance of your equity?

Case # 10.1 profit or (loss)

If your beginning equity is P5,000 while
your ending equity is P7,000, how
much is your profit or (loss) for the
period?

Case # 10.2 profit or (loss)