ACCOUNTING IDENTITY- means that the

equality must be maintained throughout all

transactions. The reason for this is because
the assets of the entity will always be
claimed by another party.

To maintain this identity, transactions

always have a dual effect on the accounting
equation.
The Accounting Equation
The Accounting Equation shows the relationship
of the basic accounting elements, Assets,
Liabilities, and Owner’s Equity.
It is also called the balance sheet equation. It is
the foundation for the double-entry bookkeeping
system. For each transaction, the total debits equal
the total credits.
ASSETS = LIABILITIES + OWNER’S EQUITY
 A debit is an accounting entry that either
increases an asset or expense account, or
decreases a liability or equity account. It is
positioned to the left in an accounting entry.

A credit is an accounting entry that either

increases a liability or equity account, or
decreases an asset or expense account.
• When total assets is P600,000 and Liabilities is P180,000, the
owner’s equity is P420,000. The equation may appear as
follows:
Assets - Liabilities = Owner’s Equity
P600,000 - P180,000 = P420,000

• Or when total assets is P900,000 and owner’s equity is

P400,000, the total liabilities is P500,000.
Assets - Liabilities = Owner’s Equity
P900,000 - P500,000 = P400,000
• The sum of Liabilities P500,000 and owner’s equity
P400,000 is the total assets of P900,000.
Liabilities P500,000 Assets

Owner’s Equity P400,000 P900,000

Elements of Accounting Equation
1. Assets- are resources owned by the business, in
order to derived some future benefits.
• Cash- money comprising of the bills and coins to buy goods, and also
to avail services that we need.
• Accounts Receivable- collectible amounts from the customers.
• Inventories- products that are normally held for sale by the store.
• Equipment- depreciated over its useful life (a contra asset account).
• Land,Building- physical store is necessary to operate for business
purposes.
• Intangible Assets- things that can neither be seen nor touched or
resources of a business with no physical existence.
2. Liabilities-
-are debts of the business enterprise.
-claims of the external parties to the business
- form of obligations to do some services or even give
something.
Accounts Payable- Obligation or debts payable by the business to
other parties for services acquired or merchandise purchase on credits.
Unearned Revenue- represent obligations of the business arising
from advance payments received before goods or services are
provided to the customer. This will be settled when certain goods or
services are delivered or rendered
EQUITY- reflects the residual claim or net asset of the business. The rights
or claim to the properties of a business enterprise
REVENUES - EXPENSES = NET INCOME/(NET LOSS)

REVENUES- The amount charged to customers for goods sold or

services rendered to them.
A business earned revenue when it sells its products or its services.
EXPENSES-The amount of assets consumed or services used
in the process of earning a revenue.
CAPITAL- It represents the net investment of the business.
 ASSETS = LIABILITIES + EQUITY
Cash Accounts Equipment Accounts Unearned Owner's Revenue Expenses
Receivable Payable Revenue Capital

Inventories
Manang Rosie's Famous Barbecues
1. INITIAL INVESTMENT. Manang Rosie has been well
known for her delicious variety of barbecues. As such,
she decided to open up a barbeque store in her
neighborhood. The store would be a sole
proprietorship business. In order to do so, she invested
P25,000 as initial capital.
ASSETS = LIABILITIES + EQUITY
Cash Owner's Capital
+P25,000 +P25,000
2. PURCHASE OF EQUIPMENT. To actually create her famous
barbecue, she would need a proper equipment to cook it.
Thus, she went to the local hardware store and bought the
necessary equipment such as grills and utensils for P20,000.

ASSETS = LIABILITIES + EQUITY

Cash Equipment Owner's Capital
P25,000 P25,000
-P20,000 +P20,000

P5,000 P20,000 P25,000

P25,000 P25,000
3. PURCHASE OF INVENTORY THROUGH CREDIT.
Manang Rosie's Barbecue require only the freshest meat which can be
bought from Ate Shayne's store in the market. Since they cost P10,000,
Manang Rosie does not have enough money to purchase this. Despite that,
Manang Rosie is already a trusted suki of this store. As such, Ate Shayne
decided to give the meat to Manang Rosie on the condition that she will
have to pay her in 30 days.
ASSETS = LIABILITIES + EQUITY

Cash Equipment Inventories Acct. Payable Owner's Capital

P5,000 P20,000 +P10,000 +P10,000 P25,000

P5,000 P20,000 P10,000 P10,000 P25,000

P35,000 P35,000
 4. PAYMENT OF EXPENSES. To actually set up a business. one of
her friends told her that she has to obtain business and other
permits from the local government. As such, she paid P1,000 to
obtain such permits.
ASSETS = LIABILITIES + EQUITY

Cash Equipment Inventories Acct. Payable Owner's Capital Expenses

P5,000 P20,000 P10,000 P10,000 P25,000

-P1,000 -P1,000
P4,000 P20,000 P10,000 P10,000 P25,000 -P1,000

P34,000 P34,000
 5. SALE OF BARBECUES. With everything in place, Manang Rosie can now sale
her famous. During the first day of her new business venture,she was able to sell
P1,000 barbecues with selling price of P20,000. Half of which was paid cash. The
other half was to be paid in 5 days.
ASSETS = LIABILITIES + EQUITY

Cash Accounts Equip. Inventories Acct. Pay Owner's Capital Revenues Expenses
Receivable
P4,000 P20,000 P10,000 P10,000 P25,000 -P1,000

+P10,000 +P10,000 +P20,000

P14,000 P10,000 P20,000 P10,000 P10,000 P25,000 P20,000 -P1,000

P54,000 P54,000
 When one sells goods, aside from earning money and revenue
from the transaction, one would also have to incur expenses.
ASSETS
= LIABILITIES + EQUITY

Cash Accts.Rec. Equipment Inventories Acct. Pay. Owner's Capital Revenues Expenses

P14,000 P10,000 P20,000 P10,000 P10,000 P25,000 P20,000 -P1,000

-P5,000 -P5,000

P14,000 P10,000 P20,000 P5,000 P10,000 P25,000 P20,000 -P6,000

P49,000 P49,000
Summary of Transactions

Assets = Liabilities + Equity

Cash Accts. Equip. Inventorie Accounts Owner's Revenue Expense
Rec. s Payable Capital s s

+P25,000 +P25,00
-P20,000 +P20,00 0
0
-P1,000 +P10,000 +P10,000
+P10,000 +P10,00 -P1,000
0 +20,000
-P5,000 -P5,000

P14,00 P10,00 P20,00 P5,000 P10,000 P25,00 P20,00 -P6,000

0 0 0 0 0
P49,000 P49,000
Note: Please study in advance. This will be our topic next week. (Profit through Operations
and We will be discussing Accounting Terms (Types of major accounts)

Determining PROFIT
Through Operation
• Cash basis of Accounting vs. Accrual basis of Accounting
Cash Basis. Revenue is recorded when cash is received from
customers, and expenses are recorded when cash is paid to
suppliers and employees.

Accrual Basis. Revenue is recorded when earned and expenses

are recorded when consumed.
note:The term "accrual" refers to any individual entry recording
revenue or expense in the absence of a cash transaction.
Example:
SALE ON CREDIT.
Expense Recognition Principle- expenses are
recognized when they are incurred.
Meaning, You’re making sure your expenses “match
up” with the related revenues.

1. Matching Principle (Associating cause and effect)

It requires that a company must record expenses in
the period in which the related revenues are earned.
Matching concept is at the heart of accrual basis of
accounting.
2. Systematic Allocation
Example:
A truck may last many years; determining how
much cost is attributable to a particular year is
difficult. In such cases, accountants may use a
systematic and rational allocation scheme to
spread a portion of the total cost to each period
of use (in the case of a truck, through a process
known as depreciation).
3. Direct Association
Example:
Some costs cannot be linked to any
production of revenue, and do not benefit
future periods either. These costs are
recognized immediately. An example would be
severance pay to a fired employee, which
would be expensed when the employee is
terminated.
• Profit measures the performance of the company.
Your net income or net loss equals your total revenues
minus your total expenses for an accounting period.

Net Income - Revenues are greater than expenses. (R>E)

Net Loss - Revenues are less than Expenses. (R<E)