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THE ACCOUNTING

EQUATION
MOTIVATION
THE THREE MAJOR ACCOUNT

•Assets (what it owns)


•Liabilities (what it owes to others)
•Owner's Equity (the difference
between assets and liabilities)
ASSETS
• are a company's resources—things the company owns.
Examples of assets include cash, accounts receivable,
inventory, prepaid insurance, investments, land, buildings,
equipment, and goodwill. From the accounting equation,
we see that the amount of assets must equal the combined
amount of liabilities plus owner's (or stockholders') equity.
LIABILITIES
• are a company's obligations—amounts the company owes.
Examples of liabilities include notes or loans payable,
accounts payable, salaries and wages payable, interest
payable, and income taxes payable (if the company is a
regular corporation). Liabilities can be viewed in two ways:
(1) as claims by creditors against the company's assets, and
(2) a source—along with owner or stockholder equity—of the
company's assets.
OWNER'S OR STOCKHOLDERS'
EQUITY
• is the amount left over after liabilities are deducted from
assets:
Assets - Liabilities = Owner's (or Stockholders') Equity.
• also reports the amounts invested into the company by the
owners plus the cumulative net income of the company that
has not been withdrawn or distributed to the owners.
THE ACCOUNTING EQUATION
• (or basic accounting equation) offers us a simple way to understand how
these three amounts relate to each other. The accounting equation for a
sole proprietorship is:

ASSETS LIABILITIES OWNERS EQUITY

• The word equation comes from the word equal. For any equation, one side
always equals another
• These equations may also be used:

ASSETS LIABILITIES LIABILITIES

• The equation shows that assets or properties of the business are owing to
outsiders (Liabilities) and to owner’s (proprietor)
ACCOUNTING EQUATION
• Examples:
Let us assume that on July 1, 1991 Orlando Reyes engaged in business
with a cash capital investment of P100,000.00. On this date, the accounting
equation is:
Assets Liabilities Owner’s Equity

Cash = = Capital

100,000 0 100,000
GROUP ACTIVITY
Transactions:
• Orlando deposited P750,000 in the bank in the name of D & W Enterprise.
• Orlando purchased land amounting to P500,000, paid in cash.
• Orlando Reyes purchased P20,000 supplies paying in the near future.
• During the month, P15,000 is paid to creditors on account.
• Received P55,000 from services rendered.
• Paid the following expenses: Salaries P10,000; Rent P5,000; Utilities P4,000 and
Miscellaneous Expense P2,000
INDIVIDUAL ACTIVITY:

• Using the given data accomplish the accounting equation by applying


necessary operations.
Assets Liabilities Owner’s
Equity
a. 760,000 360,000 ?

b. 860,000 ? 592,000

c. ? 108,000 760,000
d. 626,600 376,240 ?

e. ? 800,000 (100,000)
ASSIGNMENT
For your Assignment I want you to illustrate and perform the following transaction.
Carl has the following transaction, prepare the following equation.
• a. Business started with cash P175,000
• b. Purchased goods from Jam P50,000
• c. Sold goods on credit to Mike (Costing P17,500) P20,000
• d. Purchased furniture for office use P10,000
• e. Cash paid to Jam in full settlement P48,500
• f. Cash received from Mike P20,000
• g. Rent Paid P1,000
• h. Cash withdrew for personal use P3,000.
END