ACCOUNTING

EQUATION
 LEARNING OBJECTIVES
At the end of the lesson, the learners should be able to:
1. Illustrate the accounting equation
2. Define an account
3. Discuss the five major accounts
4. Cite examples of each type of account
5. Prepare a chart of accounts, and
6. Perform operations involving simple cases with the use of
accounting equation
 OPENING CASE
Let us continue on with the case of Jose Mercado, the sole
proprietor of the photocopying business which opened on
July 1, 2015. For the quarter ended September 31, 2015, the
business was able to make revenue of P50,000 (all in cash)
and it was able to incur expenses of P 35,000 (all in cash). As
of the end of that quarter total liabilities amounted to
P50,000. Jose Mercado wants to know the business’ total
assets and total owner’s equity. With the help of his friend
who is an accountant, he arrived at P75,000 total assets and
P25,000 total owner’s equity.
In getting these amounts, he retrieved all the business documents he had kept
for the past 3 months and reconstructed his statement of financial position as
follows:
ASSETS = LIABILITIES = OWNER’S EQUITY (OR
CAPITAL)
CASH 45,000 LOAN 50,0000 MERCADO 10,000
PAYABLE CAPITAL

PHOTOCOPYING 30,000 REVENUE 50,000

MACHINE

EXPENSES (35,000)

TOTAL ASSETS 75,000 TOTAL 50,000 TOTAL 25,000

LIABILITIES OWNER’S
EQUITY
Do you think Jose Mercado was able to compute the total assets and total
owner’s equity of the business as of the quarter ended September 30, 2015
correctly?
 DOUBLE-ENTRY BOOKKEEPING
• Is the biggest contribution of the Italian Scholars of the Renaissance period.
• Double-entry bookkeeping is a system in which at least one debit entry (left
side) and at least one credit entry (right side) are entered for each
transaction.

Every transaction has two effects; for every debit entry

there will always be an equal credit entry.
 BASIC ACCOUNTING EQUATION
SHOULD BE IN BALANCE AT ALL TIMES

ASSETS = LIABILITIES + OWNER’S

EQUITY

This basic equation is the back bone of the entire

accounting cycle. All the steps that go with the
accounting cycle should abide by this equation.