Fundamentals

of ABM 2
Bea Natalia N. Bartolome, CTT,CB, CAP
Topic of Discussion

▪ Accounting Equation
▪ Types of Major Accounts
▪ Expanded Accounting
Equation
Accounting
Equation
Accounting
Equation
ASSET = LIABILITIES + EQUITY

▪ All the processes in accounting

system must observe the equality of
the accounting equation, which is
basically an algebraic equation.
ASSETS

▪ The resources you control that

have resulted from past events
and provided you with future
economic benefits.
Essential elements
in the definition

▪ Means you have the exclusive right

to enjoy those benefits or you can
prevent others from enjoying
those benefits.
Control
Essential elements
in the definition

You have a P1,000,000.00 cash in the bank.

You have the exclusive ownership of that
money and if it earned interest you have the
sole right to it and it will only be added to
your account and not other
people’s account. EXAMPLE
Essential elements
in the definition

▪ The control over resources have

resulted from a past event or
transaction. Therefore, resources for
which control is yet to be obtained in
the future do not qualify as asset in the
present. Past Events
Essential elements
in the definition

You are planning to buy additional

computer set for your computer shop
business next year. Right now, the computer
set is not yet your asset. It will only become
your asset after purchasing it.
EXAMPLE
Essential elements
in the definition
Future Economic Benefits
Means, the potential of the resource to
provide you, directly or indirectly , with
cash.
Means, the resource is expected to provide economic
benefits over more than one accounting period. If it
provides economic benefits within one accounting
period, it is not an asset but an expense.
Essential elements
in the definition

If you buy new computer set.

It’ll be added to asset because it
can provide economic benefits
to the business for more than 1
accounting period.
If you hire a mechanic to check
up your computer and clean it
up it is not added to asset but
added to expense instead.
EXAMPLE
LIABILITIES

▪ This are your present obligations

that have resulted from past
events and can require you to
give up resources when settling
them.
 Arises from your past
Essential elements business practices or
published policies that have
in the definition created valid expectation on
the part of others that you
will pay them.

▪ An event that creates either a

legal obligation or constructive
obligation. Arises from a contract, a
law, or other operations of
law.

OBLIGATING EVENT
 LEGAL
OBLIGATION
The obligation
You purchased a laptop on was created when
credit. You took possession over you entered into
the purchase
the laptop but have not fully contract and took
paid the purchase price. You possession of the
have a liability which is the laptop.
legal obligation to pay the
purchase price. EXAMPLE
CONSTRUCTIVE
OBLIGATION
You have the liability
Your Cafe has a “money-back and obligation to
guarantee policy” for the return the money of
dissatisfied
customers who are not satisfied customers. The
with their purchases and service policy has made
valid expectations
provided. Your past experience on your customers.
shows that 7% of your sales are
returned. EXAMPLE
Essential elements
in the definition

▪ Also known as outflow of economic

benefits. It means that settling an
obligation necessarily would require
you to pay cash , to transfer non-cash
assets, or to render a service.
GIVING UP OF RESOURCES
 EQUITY

▪ It is simply assets minus liabilities.

▪ Other terms for equity are capital,
net assets, and net worth.
 Summer is a college student
on summer vacation. She
loves baking cookies as a
hobby. One day, she decided
to sell her cookies and start
up a business while on
vacation. She had estimated
that she will be needing
P5,000 as start up capital.

Problem Discussion
ASSET = LIABILITIES + EQUITY

P 3,000 P0 P 3,000

She checked her savings and

it summed up to P3,000 only.

Problem Discussion
 She went to her sister Winter
and asked her if she could
lend her P2,000 to start up
her cookie business. And
Winter agreed and gave
Summer the money.

ASSET = LIABILITIES + EQUITY

P 5,000 P 2,000 P 3,000

Problem Discussion
Expanded
Accounting
Equation
= + +
ASSET LIABILITY EQUITY INCOME EXPENSE

▪ As you can notice income is added

while expenses are deducted. These
are because income increases
equity while expenses decreases
equity.
INCOME

▪ Increases in economic benefits during

the period in the form of inflows or
enhancements of assets or decrease in
liabilities that result in increase in
equity, excluding those relating to
investments by business owners.
EXPENSE

▪ Decreases in economic benefits during

the period in the form of outflows or
depletions of assets or increase in
liabilities that result in decrease in
equity, excluding those relating to
distributions to business owners.
 Difference
between Income
and Expense

▪ It represents profit or loss of the business.

▪ If income is greater than expenses, the
difference is profit or “kita o tubo”.
▪ If income is less than expenses, the
difference is loss or “lugi”.
Expanded
Accounting
Equation
= + +
ASSET LIABILITY EQUITY PROFIT OR LOSS
P5,000 P0 P3,000 P2,000

After sometime, Summer earned P9,770

for the period and incurred expenses of
P7,770. P9,770-P7,770=P2,000
Problem Discussion
 Income and expenses or (profit or loss) are
closed to equity at the end of each accounting
period. Thus, the adjusted ending balance is
computed as follows.

Equity, beg P3,000

Equity, beg P3,000
Add:Income P9,000
Add:Profit P1,230
Less:Expense(P7,770)
Equity, end P4,230
Equity, end P4,230

Problem Discussion
ASSET = LIABILITIES + EQUITY

P 5,000 P 770 P 4,230

As you can notice regardless of its form or

variation, the accounting equation remained
balance.

Problem Discussion
 Let’s Master the Equation
ASSET = LIABILITIES + EQUITY

??? P 2,500 P 6,500

ASSET = LIABILITIES + EQUITY

P 9,000 P 2,500 P 6,500

Problem Discussion
 ASSET = LIABILITIES + EQUITY

P 10,000 ??? P 6,500

LIABILITIES = ASSET EQUITY

P 3,500 P 10,000 P 6,500

Problem Discussion
 ASSET = LIABILITIES + EQUITY

P 22,200 P 10, 500 ???

EQUITY = ASSET LIABILITIES

P 11,700 P 22,200 P 10,500

Problem Discussion
 If you have a total If you have a total
income of P10,180 and income of P7,777 and
total expense of P6,795, total expense of
How much is your P10,010, How much is
profit(loss)? your profit(loss)?

Solution: Solution:
Total Income P10,180 Total Income P 7,777
Less:Expenses P 6,795 Less:Expenses P10,010
Profit P???3,385 Loss (P???
2,233)

Problem Discussion
 If you have a profit of
If you have a profit of
P4,220 and total
P4,122 and total income
expense of P3,105, How
of P9,703, How much is
much is your total
your total expense?
income?

Solution: Solution:
Total Income P 7,325
??? Total Income P 9,703
Less:ExpensesP 5,581
Less:Expenses P 3,105
Profit P 4,220 + Profit P
???
4,122

Problem Discussion
 If you have ending total assets of P7,003, ending
total liabilities of P503, beginning equity of
P3,003, and incurred P2,004 expenses. How
much is your total income?

= + +
ASSET LIABILITY EQUITY INCOME EXPENSE
P7,003 P503 P3,003 ??? P2,004

= +
INCOME ASSET EXPENSE LIABILITY EQUITY
P5,501 P7,003 P2,004 P503 P3,003
Problem Discussion
 If you have ending total assets of P12,002,
ending total liabilities of P1,030, beginning
equity of P2,004, and total income of P5,003.
How much is your total expense for the period?

= + +
ASSET LIABILITY EQUITY INCOME EXPENSE
P12,002 P1,030 P2,004 P5,003 ???

=
EXPENSE ASSET LIABILITY INCOME EQUITY

P3,965 P12,002 P1,030 P5,003 P2,004

Problem Discussion