Accounting

Equation
PREPARED BY:
MS. JOCELYN F. ESPAÑOLA, LPT
Learning Objective: After completing this
module, the learners are expected to:
• Illustrate the accounting equation
• Perform operations involving simple
cases with the use of the accounting
equation
 The Basic Accounting Equation

ASSET = LIABILITIES + OWNER’S EQUITY

ASSETS
An assets is a resource controlled by the
entity as a result of past events and
from which future economic benefits
are expected to flow to the entity.
Conceptual Framework for Financial Rerporting

ASSETS
 LIABILITIES
A liability is a present
obligation of the entity
arising from past events,
the settlement of which is
expected to result in an
outflow from the entity of
resources embodying
economic benefits.
Conceptual Framework for Financial Reporting
CAPITAL /EQUITY
Equity is the
residual interest in
the assets of the
entity after
deducting all its
liabilities.
Conceptual Framework for Financial Reporting
RESOURCES = CLAIMS
 CLAIMS of creditors
RESOURCES =
CLAIMS of the owner
 LIABILITIES
ASSETS = +
CAPITAL
A=L+C
L=A–C
C=A–L
Asset accounts have normal balances of debit
while liability accounts and owner’s equity
accounts have normal balances of credit.
This is consistent with how they appear in the
basic accounting equation.
DEBIT CREDIT

(LEFT SIDE) (RIGHT SIDE)

Assets = Liabilities + Owner’s Equity

Normal Balance of an account
Increase Recorded by Normal Balance

Account Category

Assets / /

Liabilities / /

Owner’s Equity:

Owner’s Capital / /

Withdrawals / /

Income / /

Expense / /
1. EXAMPLE:
1. Assets invested by the owner
July 1 - Paolo Reyes started a delivery
service on July 1, 2020. The following
transactions occurred during the
month of July.
He invested PHP800,000 cash and
Cars amounting to PHP200,000
ASSET = LIABILITIES + OWNER’S EQUITY

CASH REYES, CAPITAL

P800,000 P1,000,000

CARS
P200,000
2. EXAMPLE:
2. Borrowings from the bank
July 2 – Reyes borrowed PHP100,000 cash
from PNB for use in his business.
ASSET = LIABILITIES + OWNER’S EQUITY

CASH LOANS REYES, CAPITAL

P900,000 PAYABLE P1,000,000
P100,000
CARS
P200,000
3. EXAMPLE:
3. Asset purchased for cash
July 7 – Bought tables and chairs from
Orocan and paid PHP45,000 cash
ASSET = LIABILITIES + OWNER’S EQUITY

CASH LOANS REYES, CAPITAL

P855,000 PAYABLE P1,000,000
P100,000
CARS
P200,000

FURNITURES
P45,000
4. EXAMPLE:
4. Assets purchased on account
July 15 – Various equipment were
purchased on account from Fortune for
PHP55,000
ASSET = LIABILITIES + OWNER’S EQUITY
CASH LOANS REYES, CAPITAL
P855,000 PAYABLE P1,000,000
P100,000
CARS ACCOUNTS
P200,000 PAYABLE
P 55,000
FURNITURES
P45,000

EQUIPMENT
P55,000
5. EXAMPLE:
5. Cash withdrawal by the owner
July 18 – Reyes made a cash
withdrawal of PHP5,000 for personal
use
ASSET = LIABILITIES + OWNER’S EQUITY
CASH = LOANS REYES, CAPITAL
P850,000 PAYABLE P1,000,000
P100,000
CARS = ACCOUNTS REYES, DRAWING
P200,000 PAYABLE (P5,000)
P 55,000
FURNITURES
P45,000

EQUIPMENT
P55,000
6. EXAMPLE:
6. Payment of liability
July 20 – The account due to Fortune
was paid in cash
ASSET = LIABILITIES + OWNER’S EQUITY
CASH = LOANS REYES, CAPITAL
P795,000 PAYABLE P1,000,000
P100,000
CARS REYES, DRAWING
P200,000 (P5,000)

FURNITURES
P45,000

EQUIPMENT
P55,000
The following table summarizes the effects of these transactions on the
accounting equation.
Determining profit through operation
 Accrual basis of accounting vs. Cash basis of
accounting – accrual basis recognizes revenue when
earned and recognizes expenses when incurred.
 Under the expense recognition principle, expenses
can be recognized either as: (1) matching; (2)
systematic allocation, or; (3) direct association.
 Profit measures the performance of the company. If
the revenue exceeds expenses, then it is a net profit;
otherwise, it is a net loss.
Assessment: Use the following
question set for practice.
For each transaction, tell whether the
assets, liabilities and equity will
increase (I), decrease (D) or is not
affected (NE). Write your answer on
the space provided
1. The owners invests personal cash in A: Increase
L: No Effect
the business. E: Increase

2. The owner withdraws business assets A: Decrease

L: No Effect
for personal use. E: Decrease

3. The company receives cash from a

bank loan. A: Increase
L: Increase
E: No effect
4. The company repays the bank that had A: Decrease
L: Decrease
lent money. E: No effect

5. The company purchases equipment with

its cash.
A: Increase/Decrease
L: No effect
E: No effect
PROBLEM 1: ANSWER THE FOLLOWING
QUESTION:
1. A company has assets of P1,000,000 and has liabilities of
P400,000. How much is the Capital?
2. B company has a liabilities of P500,000 and capital of P700,000.
How much are the assets?
3. C company has a assets of P4,000,000 and capital of P2,800,000.
How much are the Liabilities?

Item 1 Item 2 Item 3

C=A-L A=L+C L=A-C
C=1,000,000 – 400,000 A=500,000+700,000 L=4,000,000 – 2,800,000
C=600,000 A=1,200,000 L=1,200,000
PROBLEM 2: COMPLETE THE TABLE
ASSETS LIABILITIES CAPITAL
1 400,000 150,000 ?
2 ? 800,000 1,200,000
2,000,000
3 3,000,000 ?

4 4,200,000 896,000 ?
5 ? 523,000 755,000
PROBLEM 2: COMPLETE THE TABLE
ASSETS LIABILITIES CAPITAL
1 400,000 150,000 ?
2 ? 800,000 1,200,000
2,000,000
3 3,000,000 ?

4 4,200,000 896,000 ?
5 ? 523,000 755,000

1.250,000
2.2,000,000
3.1,000,000
4.3,304,000
5.1,278,000
THANK YOU
& GODBLESS!
Good Job on finishing Module 4.1!