PRAYER/WORDS TO

PONDER/PRAISE SONG

Fundamentals of Accountancy, Business and Management 1

ACCOUNTING EQUATION

EASTER A. LUMANG
Teacher
 The learning objectives for the week are:

➢ Illustrate the accounting equation

➢ Perform operations involving simple
cases with the use of accounting
equations.

Fundamentals of Accountancy, Business and Management 1

ACCOUNTING EQUATION
PRETEST
Directions: Write TRUE if the statement is correct, and
FALSE if otherwise.
1. The accounting equation illustrates the relationship between
the company’s assets, liabilities, and equity.
2. The three main elements of accounting are assets, liabilities,
and capital or owner’s equity.
3. There is only one single method of recording the business
transaction.
4. In an accounting equation, assets are on the right side of the
equation, opposite the liabilities and owner’s equity.
5. Accounting is based on a traditional approach of single-entry
system in which the business transaction’s dual effects are
recorded.
ACCOUNTING EQUATION
Fundamentals of Accountancy, Business and Management 1
 ASSETS = LIABILITIES + EQUITY

Fundamentals of Accountancy, Business and Management 1

ACCOUNTING EQUATION
 Business Transactions:-
Any event which involves exchange of money or
money’s worth between the firm and any other person is known
as a Business Transaction.

In other words any event which affects the business and

involves money is a Business Transaction.

Fundamentals of Accountancy, Business and Management 1

ACCOUNTING EQUATION
ILLUSTRATIONS:-
a) Capital introduced into the business by the proprietor BT

b) Sending of price list NBT

c) Purchase of goods for cash BT

d) Receiving of a price list NBT

e) Purchase of goods on credit BT

f) Placing of an order NBT

g) Sale of goods on credit BT

h) Receipt of an order NBT

 Accounting Equation
Every transaction will affect the business’s financial position.
The financial position is measured in terms of assets,
liabilities, and owner’s equity. Each basic accounting element
can be expressed in an accounting equation:
ASSETS = LIABILITIES + OWNER’S EQUITY (or STOCKHOLDER’s
EQUITY)
The foundation for analyzing business transactions is the
accounting equation. To understand the accounting equation,
let us first define and understand the nature of the basic
accounting elements namely: assets, liabilities, owner’s equity
or capital, revenues, expenses, and drawing.
 ASSET
Assets - these are the resources controlled by
the business as a result of past transactions
and events from which future economic
benefits are expected to flow to the business.
 ASSET
Assets can be classified as current assets and
noncurrent assets. Current assets are those
that can be realized reasonably in cash within
one year from the reporting date or the normal
operating cycle, whichever is longer. If an asset
cannot be classified as current, then its rightful
classification is noncurrent.
 ASSET
Examples of assets:
cash, accounts receivable, notes
receivable, inventories, unused supplies,
prepaid rent, equipment, furniture and
fixtures, building, land, allowance for
doubtful accounts, and accumulated
depreciation.
 LIABILITIES
Liabilities are the present obligations of an
entity arising from past transactions or events.
The settlement of liabilities is expected to
result in an outflow of resources from the
business embodying economic benefits.
 LIABILITIES
Liabilities can be current or noncurrent.
Current liabilities are those which are expected
to be settled in cash by the business within the
normal operating cycle of the business or
within one year from the reporting date,
whichever is longer. Noncurrent liabilities are
those liabilities that are obligations reasonably
expected to be paid in cash beyond one year.
 LIABILITIES
Examples of liabilities:
accounts payable, notes payable,
loans payable, mortgage payable, and
advances from customers.
 EQUITY
The owner’s equity contains the net difference
between total assets and total liabilities. The
owner’s drawing account is used when the
withdrawal is made by the owner to determine
total withdrawals for each accounting period.
 EQUITY
Equity is the residual interest of the owner of the
business. Meaning any assets left after paying
liabilities is the right of the owner of the
business

Four elements that affect equity:

1) Investment; 2) Withdrawal; 3)Revenue,
and; 4) Expenses
Practice: For each transaction, tell whether the assets, liabilities,
and equity will increase (I), decrease (D), or is not affected (NA)
BUSINESS TRANSACTIONS A L E
1. The owner invests personal cash in the business. ___ ___ ___
2. The owner withdraws business assets for
personal use. ___ ___ ___
___ ___ ___
3. The company receives cash from a bank loan.
4. The company repays the bank that had lent
money. ___ ___ ___
5. The company purchases equipment with its
cash. ___ ___ ___
6. The owner contributes her personal truck to the
business. ___ ___ ___
7. The company purchases supplies on credit. ___ ___ ___
8. The company purchases land by paying half in
___ ___ ___
cash and signing a note.
___ ___ ___
9. The owner withdraws cash for personal use.
___ ___ ___
10.The company repays the suppliers.
Practice: For each transaction, tell whether the assets, liabilities,
and equity will increase (I), decrease (D), or is not affected (NA)
BUSINESS TRANSACTIONS A L E
1. The owner invests personal cash in the business. 1. I NA I
2. The owner withdraws business assets for
___ ___ ___
personal use.
___ ___ ___
3. The company receives cash from a bank loan.
4. The company repays the bank that had lent
money. ___ ___ ___
5. The company purchases equipment with its
cash. ___ ___ ___
6. The owner contributes her personal truck to the
business. ___ ___ ___
7. The company purchases supplies on credit. ___ ___ ___
8. The company purchases land by paying half in
___ ___ ___
cash and signing a note. ___ ___ ___
9. The owner withdraws cash for personal use. ___ ___ ___
10.The company repays the suppliers.
Practice (25 minutes): For each transaction, tell whether the assets, liabilities
and equity will increase (I), decrease (D) or is not affected (NE)

BUSINESS TRANSACTIONS A L E
1. The owner invests personal cash in the business. 1. I NA I
2. The owner withdraws business assets for
personal use. 2. D NA D
3. The company receives cash from a bank loan. 3. I I NA
4. The company repays the bank that had lent
money. 4. D D NA
5. The company purchases equipment with its
cash. 5. NA NA NA
6. The owner contributes her personal truck to the
business. 6. I NA I
7. The company purchases supplies on credit. 7. I I NA
8. The company purchases land by paying half in
cash and signing a note. 8. I I NA
9. The owner withdraws cash for personal use. 9. D NA D
10.The company repays the suppliers. 10.D D NA
 EQUITY
Equity is the residual interest of the owner of the
business. Meaning any assets left after paying
liabilities is the right of the owner of the
business

Four elements that affect equity:

1) Investment; 2) Withdrawal; 3)Revenue,
and; 4) Expenses
 INVESTMENT
Investment is an asset or item accrued with the
goal of generating income or recognition.

* Investment may be in the owner’s equity

(capital) for Sole proprietorship, member’s
/partner’s capital in Partnership, and
Common Stock or Paid In Capital in
Corporation.
 WITHDRAWAL
Withdrawal occurs when funds are removed
from the assets of the company for personal use.

* Withdrawals are also known as Drawings

for Sole proprietorship, Distributions in
Partnership, and Dividends or Treasury
Stock in Corporations.
 REVENUE
Revenue is earnings arising from the main
operations of the business.

Examples of Revenue:
Service revenue, interest income,
sales, and professional fees
 EXPENSES
Expenses are the costs incurred by the business
in generating revenues and doing mainline
operations of the business.
Examples of expenses:
utility expense, salaries expense,
wages expense, taxes, and licenses, cost
of sales, supplies expense, doubtful
accounts expense, and depreciation
expense.
EXPANDED ACCOUNTING EQUATION

Assets = Liabilities + Owner`s

Capital – Owner`s Drawings +
Revenue – Expenses
 Assets invested by the owner

June 1 – Juan Dela Cruz started a delivery service on

June 1, 2017. The following transactions occurred
during the month of June. He invested Php800,000 cash
and Cars amounting to Php200,000

Assets = Liabilities + Owners’ Equity

Cash Php800,000 Dela Cruz, Capital Php1,000,000
Cars Php200,000
 Borrowings from the bank

June 2 – Dela Cruz borrowed Php100,000 cash from

PNB for use in his business

Assets = liabilities + Owners’ Equity

Cash Php900,000 Loans Payable Php100,000 Dela Cruz, Capital Php1,000,000
Cars Php200,000
 Assets purchased for cash

June 7 – Bought tables and chairs from Orocan and paid

Php45,000 cash

Assets = liabilities + Owners’ Equity

Cash Php855,000 Loans Payable Php100,000 Dela Cruz, Capital Php1,000,000
Cars Php200,000
Furnitures Php45,000
 Assets purchased an account

June 15 – Various equipment were purchased on

account from Fortune for Php55,000

Assets = liabilities + Owners’ Equity

Cash Php855,000 Loans Payable Php100,000 Dela Cruz, Capital Php1,000,000
Cars Php200,000 Accounts Payable Php55,000
Furnitures Php45,000
Equipment Php55,000
 Cash Withdrawal by the owner

June 18 – Dela Cruz made a cash withdrawal of

Php5,000 for personal use

Assets = liabilities + Owners’ Equity

Cash Php850,000 Loans Payable Php100,000 Dela Cruz Capital Php1,000,000
Cars Php200,000 Accounts Payable Php55,000 Dela Cruz, Drawing (pPhp5,000)
Furnitures Php45,000
Equipment Php55,000
Determining profit through operation
*Accrual basis of accounting vs Cash basis of accounting –
accrual basis recognizes revenue when earned and recognizes
expenses when incurred

* Under the expense recognition principle, expenses can be

recognized either as: (1) matching; (2) systematic allocation, or (3)
direct association.

* Profit measures the performance of the company. If the

revenue exceeds expenses, then it is a net profit; otherwise, it is a
net loss.
 Received cash for revenue earned

June 21 – A customer hired the services of Dela Cruz.

Cash of Php15,000 was received from the customer

Assets = liabilities + Owners’ Equity

Cash Php15,000 Service Revenue Php15,000
 Paid cash for expenses incurred

June 22 – Cash was paid for the following: gas and oil,
Php500 and car repairs, Php1,000.

Assets = liabilities + Owners’ Equity

Cash (Php1,500) Gas & Oil (Php500)
Repair Exp. (Php1,000)
 Revenue rendered on account

June 24 – Another customer hired the services of Dela

Cruz and promised to pay Php16,000 on June 30, 2017

Assets = liabilities + Owners’ Equity

Accounts Receivable Php16,000 Service Revenue Php16,000
 Paid for expenses incurred

June 25 – Paid Php5,000 for telephone bill.

Assets = liabilities + Owners’ Equity

Cash (Php5,000) Telephone Expenses (Php5,000)
 Revenue earned with a downpayment, balance
on account

June 27 – Another customer hired the services of Dela

Cruz. A bill was issued to them for Php20,000, 50% of
which was collected

Assets = liabilities + Owners’ Equity

Cash Php10,000 Service Revenue Php20,000
Accounts Receivable Php10,000
 Customer’s account collected in cash

June 29 – The customer on July 24 paid 50% of his

account in cash

Assets = liabilities + Owners’ Equity

Cash Php8,000
Accounts Receivable (Php8,000)
 Paid cash for expenses incurred

June 30 – Paid Php10,000 for rental of office space, and

salaries of Php9,000

Assets = liabilities + Owners’ Equity

Cash (Php19,000) Rent Expense (Php10,000)
Salaries Expense (Php9,000)
Make a sentence per items by describe the given transactions:

Date ASSETS LIABILITIES OWNER’S

EQUITY
Cash Supplies Equipment
Bal 60,000 7,500 300,000 75,000 292,500
1 150,000 150,000
2 (20,000) 20,000
3 (112,000) (112,500)
4 5,000 5,000
5 (15,000) 15,000
6 (53,000) (53,000)
7 (8,000) (8,000)
Aug. 1 Garcia invested Php48,000 cash in the business.
1 Rented office space and paid Php800 cash for the August rent.
3 Purchased exploration equipment for Php22,000 by paying
Php12,000 cash and agreeing to pay the balance in 3 months.
5 Purchased office supplies by paying Php1,500 cash.
6 Completed exploration work and immediately collected Php420 cash
for the work.
8 Purchased Php1,350 of office equipment on credit.
15 Completed exploration work on credit in the amount of Php8,000.
18 Purchased Php700 of office supplies on credit.
20 Paid cash for the office equipment purchased on August 8.
24 Billed a client Php2,400 for work completed; the balance is due in 30
days.
28 Received Php5,000 cash for the work completed on August 15.
30 Paid the assistant’s salary of Php1,100 cash for this month.
30 Paid Php340 cash for this month’s utility bill.
30 Garcia withdrew Php1,050 cash from the business for personal use.

Required: 1. Arrange the following assets, liability, and equity titles in a table: Cash;
Accounts Receivables; Office Supplies; Office Equipment; Exploration Equipment;
Accounts Payable; Garcia, Capital; Garcia, Withdrawals; Revenues; and Expenses.
2. Use additions and subtractions to show the effects of each transaction on the accounts
in the accounting equation. Show new balances after each transaction.