What I Need to Know

This module was designed and written with you in mind. It is here to help
you understand the Accounting Equation and master the skills in performing
operations that involve simple cases using the accounting equation. The scope of
this module allows you to use it in many different learning situations. The language
used recognizes your diverse vocabulary level. The lessons are arranged to follow
the standard sequence of your course.

After going through this module, you are expected to:

1. illustrate the accounting equation (ABM_FABM11-IIIb-c-17) and
2. perform operations involving simple cases with the use of accounting
equation (ABM_FABM11-IIIb-c-18)

What I Know

Read each item carefully and identify whether the statement is True or False.
Write T if it is True and F if otherwise. Write your answers on a separate answer
sheet.

1. The basic accounting equation states that assets must equal the sum of
liabilities and equity.
2. Owner’s capital and net income are common sources of equity.
3. Assets are found in the right side of the accounting equation.
4. The accounting equation provides the basic framework for recording and
summarizing business transactions.
5. In accounting, the ability to analyze transactions in terms of the basic
accounting equation is essential.
6. Liabilities can be computed by deducting the total assets from the equity.
7. Equity is also referred to as net assets of the company.
8. In the accounting equation, resources owned by the company appear on the
left-hand side.
9. All economic entities apply the accounting equation regardless of its size or
business form.
10. The claim of the owners in the company is equal to the total assets.

Lesson 1- The Accounting Equation

In all aspects of our lives we need to have balance. Having a balanced-life
they say, is the key ingredient to success. In business, accounting contributes a lot
to the success of the company. Accounting communicates the company’s financial
condition to its owners and other financial users through the financial reports.

In preparing the financial reports of the business, accountants follow the

accounting guidelines. As you have learned from the previous lesson, these
guidelines support the most basic principle in accounting which is express in terms
of an equation. This equation will serve as the foundation in preparing the
financial reports that business owners need.

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 What’s In
Businesses need financial report to know their business performance and
position. These financial reports apply the basic accounting equation supported by
the accounting guidelines. To recall your accounting guidelines, identify which one
is applied in the following situations. Choose your answer from the word pool and
write it in a separate sheet of paper.

Monetary Unit Economic EntityGoing Concern

MatchingHistorical Cost Full Disclosure

1. Mr. Maimpok is renting a space for his small laundry shop. He is

allocating 30 percent of the laundry shop’s net income for the lot he
wanted to purchase. He is planning to have a bigger shop on this lot
to cater more customers as he envisioned expanding the business in
the coming years.
2. Guimaras Mango Food Processing Company recorded ₱1,000,000
sales from its processed mango products this year. The company also
recorded ₱100,000 depreciation expense for its food processing
equipment this year.
3. Mrs. Cruz, owner of a Party Need Store in San Miguel, Guimaras
purchase a new laptop using the funds from the store to be used for
creating advertising materials. Most of the time though, the laptop
was being used by Mrs. Cruz in her post-graduate degree studies. In
the accounting record of the store, the laptop is still part of the store’s
assets.
4. ABC Company, a Filipino company having a store branch in Dubai
reported income and expenses of the Dubai branch in Philippine
Peso.
5. XYZ Company purchased a land at a cost of ₱1,000,000. After two
years the appraised value of the land is already ₱1,300,000. The
company recorded the land at its purchased amount.
What’s New

Abby is an ABM senior high school student. She purchased a laptop and a
smartphone which she needs for her online class. She also purchased various
school supplies which she will use for her class outputs. Abby is expecting a lot of
benefits from these new things, so she really takes care of them. How about you,
can you list down the things that you own? How about the things that you owe?
Can you name them? If you are to give monetary value to these things, will there be
any amount left to you after you deduct the value of the things that you owe from
the value of things that you owned? Can you express it in equation?

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 What is It
Business has two basic elements; what it owns and what it owes. The
resources owns by the business are called Assets. The right or claims against these
assets are called Liabilities and Equity. Liabilities are claims of the company’s
creditors (those that the company owes) while Equity are the claims of the owners.
The relationship of these elements can be expressed as an equation called the basic
accounting equation.

ASSETS = LIABILITIES + EQUITY

Illustration 1 – Basic Accounting Equation

The left side of the equation represents what the entity owns and the right
side of the equation represents what the company owes.

In the equation, assets must equal to the liabilities and the equity. This
equation applies to all business entities regardless of the size, nature of business,
or form of business organization. The equation provides the basic framework for
recording and summarizing the events of the business.

The basic accounting equation may be rewritten in two ways:

LIABILITIES = ASSETS – EQUITY EQUITY = ASSETS - LIABILITIES

or

Basic elements in the basic accounting equation:

1. Assets – These are resources owned by the business used in carrying out
activities such as sales or production. Assets can provide future services or
benefits that could eventually result to a cash inflow for the company.
Examples of assets are cash, accounts receivable, supplies, building,
equipment and machineries.

2. Liabilities – These are claims against the assets. These are existing debts
and obligations that the company have. These include economic activities
that results in payables such as accounts payable, notes payable, salaries
payable and taxes payable.

3. Equity – These are residual claims of the owner on total assets. It can be
computed by deducting the claims of the creditors to the total assets of the
company. Since creditor’s claims must be paid before ownership claims,
equity is often referred to as net assets. Common sources of equity are
owner’s capital and net income.

APPLICATION OF THE ACCOUNTING EQUATION

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 The basic and the most important rule when using the accounting equation
is to always maintain the accounting identity. Accounting identity means that the
equality must be hold true regardless of the value of its variables. In short, assets
should ALWAYS equal to the sum of the liabilities and equity. The two sides of the
equation should always be balanced and equal at all times.

Apply the accounting equation in the following examples:

Example 1. Using the concept of accounting equation, compute missing figures

from the following:

Assets = Liabilities + Owner’s Equity

1 ₱578,000 ? ₱152,000 :
2 ? ₱ 25,000 ₱180,500
3 ₱269,000 ₱ 45,000 ?
4 ? ₱250,000 ₱657,450
5 ₱850,000 ? ₱675,000

Answers:
Assets = Liabilities + Owner’s Equity
1 ₱578,000 ₱426,000 ₱152,000
2 ₱205,500 ₱ 25,000 ₱180,500
3 ₱269,000 ₱45,000 ₱224,000
4 ₱907,450 ₱250,000 ₱657, 450
5 ₱850,000 ₱175,000 ₱675, 000
Example 2: Island Mart reports the following assets and liabilities. Compute the
totals that would appear in the company’s basic accounting equation.
Cash……………………………… ₱ 55,000
Accounts Payable……………… 25,000
Office Supplies…………………. 1,500
Loans Payable………………….. 7,000
Accounts Receivable………….. 10,000

Answers:
TOTAL ASSETS = LIABILITIES + EQUITY
Cash ₱ 55,000 Accounts Payable ₱ 25,000
Office Supplies 1,500 Loans Payable 7,000
Accounts Receivable 10,000

Total ₱ 66,500 = Total ₱ 32,000 + Total ₱ 34,500*

*Equity = Total Assets – Total Liabilities
= 66, 500 – 32, 000
= 34, 500

Unlike the previous examples, only the amount of total liabilities is given in the
next one. This will require you to compute first the total assets to determine the
equity.

Example 3: The liabilities of Maymay Store amounts to ₱200,000, while its equity
is 1/3 of its total assets. How much is the total assets of Maymay Store?
How about its equity?

Assets = Liabilities + Equity

? ₱200,000 1/3 of assets

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From the table, substitute the given information to the equation as seen below.

Answer:

Assets(A)= Liabilities(L) + Equity (E)

A = 200,000 + ⅓ (A)
3 A = 200,000 + ⅓ (A)
3A = 600,000 + A
3A - A = 600,000 + A - A
3A - A = 600,000
2A = 600,000
=

A = 300,000

Equity (E) = Assets (A) – Liabilities (L)

E = 300,000 – 200,000
E = 100,000

To check,
Assets = Liabilities + Equity
₱300,000 = ₱200,000 + ₱100,000
₱300,000 = ₱300,000 The equation is balanced.

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 What I Have Learned

Assets, Liabilities, and Equity are the basic elements of theBasic Accounting Equation. It is illustrated as:
In the equation, assets must equal to the liabilities and the equity.
ASSETS = LIABILITIES +EQUITY
The basic accounting equation applies to all business entities regardless of the size, nature of business, or form o
The equation provides the basic framework for recording and summarizing the events of the business.
In solving accounting cases using the accounting equation, it is important to note that:
Each transaction is analyzed in terms of its effect on the three components of the basic accounting equa
both sides of the equation must always be equal.

What I Can Do
How much is your worth?

Earlier, you have heard about Abby, the things she owned, and how she took
care of them. Now, it’s time to know yours.

Let us check if you can apply your learnings about the accounting equation.
Following the format given, lists down all the things that you own, the things that
you owe and compute for your equity. Give an actual value to each of these things
and place them on the correct column of the equation. It will lead you to discover
how much is your net worth. Do it using a separate sheet of paper.

Assets = Liabilities + Equity

Ex: Cellphone ₱ 8,000 Payable to Parents – ₱ 5,000 ₱ 3,000

Assessment
I. Read each item carefully and write the letter of your choice in a separate
sheet of paper.

1. Which of the following illustrates the basic accounting equation.

a. Assets = Liabilities - Equity b. Assets + Liabilities = Equity
c. Assets = Liabilities + Equity d. Assets + Equity = Liabilities

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2. Element of the basic accounting equation which is found on the left side of the
equation.
a. assets b. liabilities
c. equity d. liabilities and equity

3. Basic accounting equation element which is considered the residual claim of the
owner on total assets.
a. assets b. liabilities
c. equity d. revenue

4. In business, there are two elements; the resources owned by the company and
the claims against these resources. Which is considered claims of the company’s
creditors?
a. equity b. liabilities
c. assets d. expenses
5. Which of the following statements is not true about the accounting equation?
a. It represents the relationship of b. Both sides of the equation is always
the assets, liabilities and equity. equal.
c. The accounting equation applies d. In the equation, assets must equal
to all business entities regardless to the liabilities.
of the size, nature or form.

II. Using the accounting equation, determine the missing amounts in the
following scenarios:

1. The assets of Maria Gracia Café total ₱2,000,000 while its liabilities only
amount to ₱800,000. What is the total equity of Maria Gracia Café?
2. The liabilities of Lupe Merchandising is ₱3,000,000 while its equity is
only half of its total assets. What is the total equity of Lupe
Merchandising?
3. The total equity of Shine Home Depot is ₱25,000,000 which is one thirds of
its total assets. How much is the total liabilities of Shine Home Depot’s?
4. How much should the assets of Maymay’s Restaurant be if its equity is
₱4,000,000 and its liabilities only amounts to 1/3 of its total assets?
5. How much should the assets be of Terence Boutique if the liabilities is only a
third of its equity and the total liabilities is ₱1,500,000?

Additional Activities

Using your knowledge of the accounting equation, solve the problem below
and answer the additional questions.

Problem: The store owner of ABM Marketing would like to know how much his
Capital Balance increased for the year 2019. He started with a Capital of ₱200,000
in 2017. He provided you with the following information about the business for
2019:

Cash ₱ 80,000 Loans Payable ₱450,000

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Accounts Payable 80,000 Inventories 430,000
Accounts Receivable 120,000 Building 380,000

How much is the increase in Owner’s Equity?

Additional questions:
1. What is the importance of knowing the basic accounting equation?
2. What should be remembered when using the accounting equation?

Answer Key

References

MELCS, K to 12 Curriculum Guide in Fundamentals of Accountancy, Business, and

Management 1

Teaching Guide for Senior High School, Fundamentals of Accountancy, Business, and
Management 1. Published by CHED, 2016

Jerry_Weygandt . Accounting Principles 12th Edition.