Chapter 2: Accounting Equation

ACCO 014 – PRINCIPLE OF ACCOUNTING

UNIVERSITY OF THE PHILIPPINES

DILIMAN
Paul John JapsonOF
SCHOOL Capote, LPT, MST-Math
STATISTICS
Instructor I

Polytechnic University of the Philippines—Parañaque City Campus

 Chapter Outline
II. Accounting Equation
1. Importance of the accounting equation
2. Illustrations of accounting equation

ACCO 014—Principles of Accounting

 Importance of Accounting Equation
 Business transactions affect the assets, liabilities, and proprietorship of the
business.
𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 (From creditors)
𝑨𝒔𝒔𝒆𝒕𝒔=𝑬𝒒𝒖𝒊𝒕𝒊𝒆𝒔
𝑬𝒒𝒖𝒊𝒕𝒊𝒆𝒔
𝑷𝒓𝒐𝒑𝒓𝒊𝒆𝒕𝒐𝒓𝒔𝒉𝒊𝒑
(From owner)

𝑨𝒔𝒔𝒆𝒕𝒔=𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 +𝑷𝒓𝒐𝒑𝒓𝒊𝒆𝒕𝒐𝒓𝒔𝒉𝒊𝒑

ACCO 014—Principles of Accounting

 Illustrations of Accounting Equation
Transaction 1: Mr. Gil opened a motor repair shop and invested P100,000 cash.

Cash = P100,000 Capital = P100,000

𝐀𝐬𝐬𝐞𝐭𝐬=𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬+𝐏𝐫𝐨𝐩𝐫𝐢𝐞𝐭𝐨𝐫𝐬𝐡𝐢𝐩
Analysis:
Increase in Assets = Increase in Proprietorship

ACCO 014—Principles of Accounting

 Illustrations of Accounting Equation
Transaction 2: He purchased repair supplies worth P25,000 on credit from De Mesa
Trading.

Repair Supplies = P25,000 Account Payable = P25,000

𝐀𝐬𝐬𝐞𝐭𝐬=𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬+𝐏𝐫𝐨𝐩𝐫𝐢𝐞𝐭𝐨𝐫𝐬𝐡𝐢𝐩
Analysis:
Increase in Assets = Increase in Liability

ACCO 014—Principles of Accounting

 Illustrations of Accounting Equation
Transaction 3: Billed M. Manzano for repair work done on his automobile, P12,000

Account Receivable= P12,000 Income = P12,000

𝐀𝐬𝐬𝐞𝐭𝐬=𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬+𝐏𝐫𝐨𝐩𝐫𝐢𝐞𝐭𝐨𝐫𝐬𝐡𝐢𝐩
Analysis:
Increase in Assets = Increase in Proprietorship

ACCO 014—Principles of Accounting

 Illustrations of Accounting Equation
Transaction 4: He bought a table and chairs for the business, P6,000 cash

Furniture = P6,000

𝐀𝐬𝐬𝐞𝐭𝐬=𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬+𝐏𝐫𝐨𝐩𝐫𝐢𝐞𝐭𝐨𝐫𝐬𝐡𝐢𝐩
Analysis:
Cash = P6,000
Increase in one form of Asset = Decrease
in another form of asset

ACCO 014—Principles of Accounting

 Illustrations of Accounting Equation
Transaction 5: Issued a promissory note to De Mesa Trading to apply on his account.

Note Payable = P25,000

𝐀𝐬𝐬𝐞𝐭𝐬=𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬+𝐏𝐫𝐨𝐩𝐫𝐢𝐞𝐭𝐨𝐫𝐬𝐡𝐢𝐩
Analysis:
Account Payable = P25,000 Increase in one form of liability =
Decrease in another form of
liability
ACCO 014—Principles of Accounting
 Illustrations of Accounting Equation
Transaction 6: Paid the salary of the assistant, P1,900.

Cash = P1,900 Capital = P1,900

𝐀𝐬𝐬𝐞𝐭𝐬=𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬+𝐏𝐫𝐨𝐩𝐫𝐢𝐞𝐭𝐨𝐫𝐬𝐡𝐢𝐩
Analysis:
Decrease in asset = Decrease in Proprietorship

ACCO 014—Principles of Accounting

 Illustrations of Accounting Equation
Transaction 7: Paid the note issued to De Mesa (see Transaction 5)

Cash = P25,000 Note Payable = P25,000

𝐀𝐬𝐬𝐞𝐭𝐬=𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬+𝐏𝐫𝐨𝐩𝐫𝐢𝐞𝐭𝐨𝐫𝐬𝐡𝐢𝐩
Analysis:
Decrease in asset = Decrease in Liabilities

ACCO 014—Principles of Accounting

 Illustrations of Accounting Equation
Purchased equipment amounting to P45,000 from Verano Trading on
Transaction 8: credit of which he paid P5,000 cash as down payment and signed a
note for the remaining balance.
Equipment = P45,000 Note Payable = P40,000

𝐀𝐬𝐬𝐞𝐭𝐬=𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬+𝐏𝐫𝐨𝐩𝐫𝐢𝐞𝐭𝐨𝐫𝐬𝐡𝐢𝐩

Cash = P5,000 Analysis:

Decrease in one form of asset and increase in another
form of asset = Increase in Liabilities
ACCO 014—Principles of Accounting
 Illustrations of Accounting Equation
Transaction 8: He withdrew P15,000 from the business for his personal use.

Cash = P15,000 Capital = P15,000

𝐀𝐬𝐬𝐞𝐭𝐬=𝐋𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬+𝐏𝐫𝐨𝐩𝐫𝐢𝐞𝐭𝐨𝐫𝐬𝐡𝐢𝐩

Analysis:
Decrease in asset = Decrease in proprietorship

ACCO 014—Principles of Accounting