Fundamentals of Accountancy, Business and Management 1

Module 3. The Accounting Equation

Teacher: JESSKA SO
ACTIVITY SHEET

ACCOUNTING EQUATION
The accounting equation is the foundation of double-entry accounting. It represents the relationship
between a company's assets, liabilities, and owner's equity.
The equation is: Assets = Liabilities + Owner’s Equity
Here's a breakdown of each component:
1. Assets: These are resources owned by the company that provide future economic benefits.
Examples include cash, inventory, equipment, and accounts receivable.
2. Liabilities: These represent the company's obligations to external parties. Liabilities can include
loans, accounts payable, and other debts.
3. Owner's Equity: Also known as shareholders' equity or net assets, owner's equity represents
the owner's claim on the company's assets after deducting liabilities.
The accounting equation must always balance, meaning that the total value of assets must equal the
sum of liabilities and owner's equity. This principle ensures that the company's resources are properly
accounted for and that all transactions are recorded accurately.

SAMPLE PROBLEM
On January 1, 2024, XYZ Corporation, a company in the Philippines, started its business with the
following financial information:
1. Assets:
• Cash: ₱40,000
• Accounts Receivable: ₱20,000
• Inventory: ₱30,000
• Equipment: ₱50,000
Total Assets: ₱140,000
2. Liabilities:
• Accounts Payable: ₱30,000
• Bank Loan Payable: ₱50,000
Total Liabilities: ₱80,000
3. Equity:
Owner’s Equity: ₱60,000

The demonstration of the accounting equation is shown below:

Assets = Liabilities + Equity
₱140,000 = ₱80,000 + ₱60,000

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EXPANDED ACCOUNTING EQUATION
The expanded accounting equation is a variation of the basic accounting equation (Assets = Liabilities
+ Equity) that includes additional components to provide a more detailed picture of a company's
financial position.
The expanded equation is:
Assets = Liabilities + Owner’s Equity + Revenues – Expenses − Drawings

Here's a brief discussion of each component:

1. Assets: These are the economic resources owned or controlled by a business that provide future
benefits. Assets can include cash, inventory, equipment, and accounts receivable.
2. Liabilities: These represent the company's obligations to external parties, such as loans,
accounts payable, and other debts.
3. Owner's Equity: Also known as shareholders' equity or net assets, owner's equity represents
the owner's claim on the company's assets after deducting liabilities. It includes investments by
the owner and retained earnings.
4. Revenues: Revenues are the amounts earned by a company from its primary activities, such as
sales of goods or services. Revenues increase equity.
5. Expenses: Expenses are the costs incurred by a company in its efforts to generate revenues.
Examples include salaries, rent, utilities, and supplies. Expenses decrease equity.
6. Drawings: Drawings are withdrawals of assets by the owner for personal use and are not
considered expenses of the business. Drawings decrease equity.

The expanded accounting equation helps stakeholders understand the sources of a company's assets
and how those assets are financed (liabilities and equity). It also highlights the impact of revenues,
expenses, and owner's withdrawals on the overall financial position of the business.

SAMPLE PROBLEM
XYZ Corporation, a company based in the Philippines, has the following information for the year ended
December 31, 2023: Liabilities- ₱100,000, Owner's Equity- ₱200,000, Revenues- ₱500,000, Expenses-
₱300,000, Drawings- ₱50,000. Using the expanded accounting equation, calculate the total assets of
XYZ Corporation as of December 31, 2023.

Solution:
The expanded accounting equation is:
Assets = Liabilities + Owner’s Equity + Revenues – Expenses − Drawings
Substitute the given values into the equation:
Assets = ₱100,000 + ₱200,000 + ₱500,000 − ₱300,000 − ₱50,000
Assets = ₱450,000
Therefore, the total assets of XYZ Corporation as of December 31, 2023, are ₱450,000.

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 Fundamentals of Accountancy, Business and Management 1
Module 3. The Accounting Equation
Teacher: JESSKA SO
ACTIVITY SHEET

NAME: ____________________________________________ SECTION: ___________________ SCORE:______

Exercise 1. Given the following information. Find the missing amount.

ASSETS LIABILITIES OWNER’S EQUITY
1 P 500, 000 P 200, 000
2 P 340, 000 P 560, 000
3 P 500, 000 1/4 of Assets

Exercise 2. Compute the amount of the missing element of financial position.

1. A pest control company has assets of P 600, 000 and owner’s equity of P 450, 000.
2. A real estate agency has liabilities of P 530, 000 and owner’s equity of P 410, 000.
3. A plumbing contractor has assets of P 473, 000 and liabilities of P 153, 700.
4. An aerobics company has liabilities of P 147, 000 and owner’s equity of P 236, 500.
5. A movie theater has assets of P 624, 000 and liabilities of P 237, 000.

Exercise 3. Determine the missing amounts in the following scenarios. Show your computation.
1. What should be the assets of Dumaya Beauty Salon if its equity is P 125,000.00 and its liabilities
amount only of P 37,500.00?
2. What should be the equity of Garay Construction Supplies if the liabilities amount to P
400,000.00, which is 1/3 of the total assets? How much would be the owner's equity?
3. If the total owner's equity is thrice the total liabilities which is ¼ of total assets. What would be
the total owner's equity of the business? The amount of total assets is P 800,000.00.

Exercise 4. For each of the transaction, indicate whether the assets (A), liabilities (L), or owner’s equity
(OE) increased (+), decreased (-) or did not change (o) by placing the appropriate sign in the appropriate
column.

During the month of May, Mirabueno Company had the following transactions:
TRANSACTIONS A L OE
1. Paid salaries.
2. Acquired equipment on credit.
3. Purchased supplies in cash.
4. Additional investment by owner.
5. Received payment for service rendered
6. Made partial payment on equipment acquired on credit.
7. Billed customers for services performed.
8. Withdrew cash for personal use.
9. Received payment from customers already billed.
10. Payment of utilities.

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Exercise 5. Let us analyze the effect of the transactions on the accounting equation with Mirmo Auto
Repair Shop, the transactions took place for March. Using the given format.
1 Mirmo invested in cash P 100,000.00 and tools worth P30,000.00 to start his business.
2 Purchased equipment for cash P 20,000.00
3 Received cash from various customers, P 5,500.00
4 Purchased equipment on account for P 10,000.00 from Nancy’s Car and Auto Supplies
8 Billed customers for the repairs of their vehicle, P 25,000.00
10 Paid 40% of its account due to Nancy’s Car and Auto Supplies.
20 Mirmo made a withdrawal amounting to P 5,000.00
22 Collected P 10,000.00 from customers who were billed.
30 Paid salaries of employees and utilities, P10, 000 and P 4, 500.00, respectively.

ASSETS LIABILITIES OWNER’S EQUITY

DATE CASH ACCOUNTS TOOLS EQUIPMENT ACCOUNTS OWNER’S DRAWING REVENUE EXPENSE
RECEIVABLES PAYABLE EQUITY

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