Document no.

INTERNATIONAL SCHOOL OF ASIA AND THE PACIFIC ISAP-QMS-DCO-ILG (ACCTG 100)

Effective Date:
TITLE: SOLE PROPRIETORSHIP, PARTNERSHIP and
CORPORATION
September 2020
Revision No. 00

LESSON 3
THE ACCOUNTING EQUATION (8 Hours)
Definitions

• Assets – are the economic resources you control that have resulted from past events and can provide
you with economic benefits.
• Liabilities – are your present obligations that have resulted from past events and can require you to
give up economic resources when settling them.
• Equity – is assets minus liabilities.
THE ACCOUNTING EQUATION
Assets = Liabilities + Equity

ILLUSTRATION 1.

You decided to put up a barbeque stand and have estimated that you will be needing ₱1,000 as a start-up
capital. You then went to your closet and broke Mr. Piggy Bank, which you have been saving for quite some
time now. Alas! You only have ₱400. You went your mama and asked her to give you ₱600 but she told you
that she has no money for now. But don’t give up hope yet, Mr. Bombay is just around the corner.

 As of this point, your accounting equation is as follows:

Assets = Liabilities + Equity
400 = 0 + 400
Notes:
• Your total assets are ₱400- the amount of economic resources that you control.
• You don’t have any liability yet because you are still negotiating with Mr. Bombay.
• Your Equity is also ₱800- the one that came from your savings.

After a lengthy negotiation, Mr. Bombay agreed to lend you ₱600.

 As of this point, your accounting equation is as follows:
Assets = Liabilities + Equity
1000 = 600 + 400
Notes:
• Your total assets are now ₱1,000- the total amount of economic resources that you control
(₱400 from Mr. Piggy plus ₱600 from Mr. Bombay)
• Of your total assets of ₱2,000:
a. ₱600 represents your liability, the amount that you are obligated to pay Mr. Bombay in the
future.
b. ₱400 represents your equity- the one that came from your savings.

Notice that from Piggy to Bombay, the accounting equation remains balanced. If the accounting
equation doesn’t balance, there is something wrong!

Basically, the accounting equation is an algebraic expression. Therefore, we can make variations from it.
Analyze the variations below:

Revision No. Details Organizer Reviewer Approving Date Page No.

00 Original Subject Teacher Program Coordinator/Dean Academic Affairs September 2020 27 of 159
 Document no.
INTERNATIONAL SCHOOL OF ASIA AND THE PACIFIC ISAP-QMS-DCO-ILG (ACCTG 100)
Effective Date:
TITLE: SOLE PROPRIETORSHIP, PARTNERSHIP and
CORPORATION
September 2020
Revision No. 00

Original form of the equation:

Assets = Liabilities + Equity
1000 = 600 + 400

Variation #1:
Assets - Liabilities = Equity
1000 - 600 = 400

Variation #2:
Assets - Equity = Liabilities
1000 - 400 = 600

THE EXPANDED ACCOUNTING EQUATION

Assets = Liabilities + Equity + Income - Expenses

Assets = Liabilities + Equity + Profit/ - Loss
Definitions
• Income – is increases in economic benefits during the period in the form of increases in assets, or
decreases in liabilities, that result in increases in equity, excluding those relating to investments by the
business owner.
• Expenses – are decreases in economic benefits during the period in the form of decreases in assets, or
increases in liabilities, that result in decreases in equity, excluding those relating to distributions to the
business owner.
• The difference between income and expenses represents profit or loss.
• If income is greater than expenses, the difference is profit.
• If income is less than expenses, the difference is loss.
TEACHER’S INSIGHT
 profit means ‘kita’ or ‘tubo’ in Filipino.
 loss means ‘lugi’ in Filipino.

ILLUSTRATION 2. (continuation of ILLUSTRATION 1 above)

During the period, you earned income of ₱5,000 and incurred expenses of ₱3,100. At the end of the period,
your total assets increased from ₱1,000 to ₱2,500 and your total liabilities decreased from ₱600 to ₱200.

 Your expanded accounting equation is as follows:

Assets = Liabilities + Equity + Income - Expenses
2,500 = 200 + 400* + 5,000 - 3,100
*this represents your equity from ILLUSTRATION 1 above.

We can also derive the following variation from the equation above:

Assets + Expenses = Liabilities + Equity + Income

2,500 + 3,100 = 200 + 400* + 5,000

Your profit for the period is ₱1,900 (₱5,000 income minus ₱3,100 expenses). There is profit because
income is greater than expenses.

Revision No. Details Organizer Reviewer Approving Date Page No.

00 Original Subject Teacher Program Coordinator/Dean Academic Affairs September 2020 28 of 159
 Document no.
INTERNATIONAL SCHOOL OF ASIA AND THE PACIFIC ISAP-QMS-DCO-ILG (ACCTG 100)
Effective Date:
TITLE: SOLE PROPRIETORSHIP, PARTNERSHIP and
CORPORATION
September 2020
Revision No. 00

Assets = Liabilities + Equity + Profit

2,500 = 200 + 400* + 1,900
Income and expenses (profit/loss) are closed to equity at the end of each accounting period. Thus, the
adjusting ending balance of equity is computed as follows:

Equity, beginning 400 Equity, beginning 400

Add: Income 5,000 Add: Profit (1,900)
Less: Expenses (3,100) Equity, Ending 2,300
Equity, Ending 2,300

TEACHER’S INSIGHTS
For this lesson, the most important thing to remember is that the
accounting equation must be always balanced. Please DO NOT forget
this concept my friend! The equality of the accounting equation must
be maintained in all the accounting process of recording, classifying
and summarizing. If the accounting equation doesn’t balance, there
is something wrong!

Revision No. Details Organizer Reviewer Approving Date Page No.

00 Original Subject Teacher Program Coordinator/Dean Academic Affairs September 2020 29 of 159