ACCOUNTING

EQUATION
Assets,Liabilities
, & Equity
 ACCOUNTING EQUATION
The basic accounting equation can be explained by how resources (assets) of a
company are being acquired. These resources are to be used in their business operations.
Accordingly, a company’s asset can be obtained by external financing and internal financing.
External financing means resources are acquired on credit (liability) while internal financing
by means of investment (equity) of other person to the entity. For this, we can illustrate
accounting equation as:

Needless to say, assets of the company are owned by claims from creditors and equity of the
investors.
 Or Simply;

ASSETS = LIABILITIES + EQUITY

DEFINITION OF
TERMS
1. Assets – all items of property that contribute to the value of
an organization.
2. Liabilities –are the indebtedness of the business.
3. Owner’s Equity – also known as capital. It is the residual
value between assets and liabilities.
4. Proprietorship – a business solely owned by one individual
5. Proprietor – owner of a sole proprietorship business
6. Accounting equation – is represented by assets is equal to
liabilities plus owner’s equity
ILLUSTRATIVE
PROBLEM ON
ACCOUNTING
EQUATION
Case 1
ASSETS P? Checking:
LIABILITIES 500,000
EQUITY 500,000
1,000,000 = 500,000 + 500,000

With the equation that Asset = 1,000,000 = 1,000,000

Liabilities + Equity
We can say that the asset is
1,000,000. Remember that the
ASSETS should be equal to
LIABILITIES and EQUITY.
Case 2
ASSETS P2,000,000     Checking:
LIABILITIES ?
EQUITY 500,000
2,000,000 = 1,500,000 + 500,000

With the equation that Asset = 2,000,000 = 2,000,000

Liabilities + Equity
we can derive to the formula Asset
– Equity = Liabilities (2,000,000 –
500,000 = 1,500,000). So liability is
1,500,000.
Case 3
ASSETS P2,000,000 Checking:
LIABILITIES 300,000
EQUITY ?
2,000,000 = 1,300,000 + 700,000

With the equation that Asset = 2,000,000 = 2,000,000

Liabilities + Equity
We can derive to the formula
Asset – Liabilities = Equity
(2,000,000 – 300,000 = 1,700,000).
So, Equity is 1,700,000.
 T-ACCOUNT

T -account
i s c a lled t er T. It is
Thi s t
like le e right
l o ok s
ei t , th
becaus nto two sides (debit).
i de
divided it), the left si
red
side (c
T-ACCOUNT
DEBIT CREDIT
Assets Liabilities
Withdrawals Capital/Equity
Expenses Revenue

The normal balance of Asset is Debit, and

the normal balance of Liability and Equity is
Credit.
Case 1
ASSETS P? T - Account
LIABILITIES 500,000
DEBIT CREDIT
EQUITY 500,000
1,000,000 500,000

Given the value of liabilities 500,00

and equity, lets compute how much
is the assets using T-account.
Case 2
ASSETS P2,000,000    
T - Account
LIABILITIES ?
EQUITY 500,000 DEBIT CREDIT

2,000,000 1,500,000

Given the value of assets and 500,00

equity, lets compute how much is
the liabilities using T-account.
Remember that the debit and
credit should be balance or
equal.
Thank
you!