The Accounting Equation

and
Types of Accounts
 The Accounting Equation

Assets = Liabilities + Equity

Elements of the Accounting Equation
• 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. Other
terms are capital, net assets and net worth.
Illustration 1:
You decided to put up a barbeque stand and have estimated that you
will be needing P2,000 as start-up capital. You check your savings and
you found you have P800. At this point, you went to your mother to
borrow the P1,200 but she told you she has no extra money.

Your accounting equation is:

Assets = Liabilities + Equity

800 = 0 + 800

Illustration 2
Now, you decided to borrow from a friend the balance

Your accounting equation is

Assets = Liabilities + Equity

2,000 = 1,200 + 800

 The Expanded Accounting Equation

Assets = Liabilities + Equity + Income - Expenses

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.
Illustration 3
Using the same information in Illustration Nos. 1 and 2
During the period, you earned income of P10,000 and
incurred expenses of P6,200.

At the end of the period, your total assets incred to P5,000

and total liabilities decreased to P400.

Your expanded accounting equation is

Assets = Liabilities + Equity + Income - Expenses

5,000 = 400 + 800 + 10,000 - 6,200

Assets = Liabilities + Equity + Profit

5,000 = 400 + 800 + 3,800

Applications of the accounting
equation
1. If total assets is ₱10,000 and total liabilities is ₱6,000,
how much is the total equity?
2. If total liabilities is ₱5,000 and total equity is ₱4,000,
how much is the total assets?
3. If total assets is ₱10,000 and total equity is ₱3,000,
how much is the total liabilities?
4. If total income is ₱10,000 and total expenses are
₱3,000, how much is the profit or loss?
5. If total income is ₱10,000, total expenses are ₱8,000,
total liabilities is ₱7,000, and total equity (before
profit or loss) is ₱6,000, how much is the total assets?
Applications of the accounting
equation
6. If you have total income of P5,000 and total expenses of P2,000,
how much is your profit (or loss)?
7. If you have total expenses of P2,000 and a
profit of P3,000, how much is your total income?
8. You have ending total assets of P4,800, ending total
liabilities of P1,000 and beginning equity is P800. If your total
expenses for the period amount to P2,000, how much is your
total income?
9. You have ending total assets of P4,800, ending total
liabilities of P1,000 and beginning equity is P800. If your total
income for the period amount to P5,000, how much is your
total expenses?
10.Your beginning equity is P5,000. If your total income for the
period is P8,000, while your total expenses are P6,000, how
much is the ending balance of your equity
The Account

• An account is the basic storage of

information in accounting.
• It is a record of the increases and decreases
in a specific item of asset, liability, equity,
income or expense.
The T-Account
The Five Major Accounts
1. ASSETS – are the resources you control that have resulted from
past events and can provide you with economic benefits.
2. LIABILITIES – are your present obligations that have resulted
from past events and can require you to give up economic
resources when settling them.
3. EQUITY – is assets minus liabilities.
4. INCOME – are increases in economic benefits during the period
in the form of inflows or enhancements of assets or decreases
of liabilities that result in increases in equity, other than those
relating to investments by the business owners.  
5. EXPENSES – are decreases in economic benefits during the
period in the form of outflows or depletions of assets or
increases of liabilities that result in decreases in equity, other
than those relating to distributions to the business owners.
Classifications of The Five Major Accounts
1. According to financial statements where they appear
a. Balance sheet accounts – accounts that are the
components of the statement of financial position.
b. Income Statement Accounts - accounts shown in the
statement of comprehensive income.
2. Traditional classification
a. Permanent or real accounts – this refers to accounts
that are not closed (bring down to zero) at the end of
every accounting period. These are accounts found in
the balance sheet.
b. Temporary or nominal accounts - this refers to
accounts that are closed at the end of every accounting
period. These are accounts found in the income
statement.
Classifications of The Five Major Accounts
c. Mixed accounts – this refers to accounts that are partly
real and partly nominal at initial recording.
d. Companion accounts – this refers to the account that is
always shown with another account. There are two
types of companion accounts:
i. Contra accounts – an account with a balance
opposite the normal accounts in its category. An
example of a contra account is Accumulated
Depreciation. It has a credit balance and shown
among the assets ( with debit balances). A contra
account decreases the valuation of an account.
Classifications of The Five Major Accounts
ii. Adjunct accounts – an account with a balance similar
to the normal accounts in its category. An example of
adjunct account is Premium on Bonds Payable. It has
a credit balance and shown among the liabilities
(credit balance). An adjunct account increases the
valuation of an account.
Chart of Accounts
A chart of accounts is a list of all the accounts used by a
business.
Chart of Accounts
NIKHOLI EVENTS MANAGEMENT
CHART OF ACCOUNTS

Account Account Name Account Account Name

Number Number
ASSETS REVENUES
100 Cash in bank 400 Service Fees
101 Accounts Receivable
101-A Allowance for bad debts EXPENSES
102 Office Supplies 500 Salaries and Wages Expense

103 Prepaid Insurance 501 Office Supplies Expense

104 Equipment 502 Rental Expense
104-A Accumulated Depreciation 503 Utilities Expense
504 Depreciation Expense
LIABILITIES 505 Insurance Expense
200 Accounts Payable 506 Interest Expense
201 Accrued Utilities 507 Income Summary
202 Loans Payable

OWNER'S EQUITY
300 Nikholi, Capital
301 Nikholi, Personal
 Common Account Titles
• BALANCE SHEET ACCOUNTS
ASSETS
a. Cash
b. Accounts receivable
c. Allowance for bad debts
d. Notes receivable
e. Inventory
f. Prepaid supplies
g. Prepaid rent
h. Prepaid insurance
i. Land
j. Building
k. Accumulated depreciation - Building
l. Equipment
m. Accumulated depreciation - equipment
 Common Account Titles - Continuation
• BALANCE SHEET ACCOUNTS
LIABILITIES 
a. Accounts payable
b. Notes payable
c. Interest payable
d. Salaries payable
e. Utilities payable
f. Unearned income
 Common Account Titles - Continuation
• BALANCE SHEET ACCOUNTS
EQUITY
a. Owner’s capital (or Owner’s equity)
b. Owner’s drawings
 Common Account Titles - Continuation
• INCOME STATEMENT ACCOUNTS
INCOME
a. Service fees
b. Sales
c. Interest income
d. Gains
 Common Account Titles - Continuation
• INCOME STATEMENT ACCOUNTS
EXPENSES
a. Cost of sales (or Cost of goods sold)
b. Freight-out
c. Salaries expense
d. Rent expense
e. Utilities expense
f. Supplies expense
g. Bad debt expense
h. Depreciation expense
i. Advertising expense
j. Insurance expense
k. Taxes and licenses
l. Transportation and travel expense
m. Interest expense
n. Miscellaneous expense
o. Losses