ACCOUNTING

EQUATION
At the end of this chapter, the students should be able to:
1. Define the accounting equation
2. Enumerate and explain the elements of the accounting equation; and
3. Solve basic problems applying the accounting equation
What are the things you need to add on the stall for the business?
• What is the nature of the business?
• Who owns the things?
• Assuming your parents are the owner of that
business, how can they acquire those things
inside the stall?
• If your parent’s money is not enough, where do
you think they can get the money?
• What can you say about those things or those
assets?
ASSETS
• are a company's resources—things the
company owns in order to derive some
future benefits.
Examples of Assets

• 1. CASH – it is the money that we use comprising of the

bills and coins, we can also consider cash as the money
that is deposited in the banks and even undeposited
checks from customers.
• 2. ACCOUNTS RECEIVABLE – this represents amounts
that are collectible from customers. They arise when a
business sells its goods or services on account or on
credit.
5. LAND AND BUILDING – owned by the business so
that they can use them for operations.
6. INTANGIBLE ASSETS – assets that can neither be
seen nor touched. Example; Computer software, Patent
3. INVENTORIES – goods or products that are
normally held for sale in its normal operation.
STOCK OF MERCHANDISE/ITEMS
4. EQUIPMENT – these are the things used by the
business for a specific purpose. Oven, Computer,
Printer
 LIABILITIES
• are company's obligations—amounts the company owes.
• Claims of external parties from the entity/business
1. Accounts Payable – an obligation to pay its supplier after a
certain number of days.
- debts arising from the purchase of an asset or acquisition of
services on account.
2. Unearned Revenue - is money received from a customer for work
that has not yet been performed.
 OWNER’s EQUITY
• Reflects the residual claims or net assets of the
owners of an entity/business.
• the amount left over after liabilities are deducted
from assets:
• Equity comes from two sources
- Investment of the owner
- Income of the business from its normal operation
Revenues – Expenses = Net Income / (Net Loss)
Elements of Owner’s Equity
1. Investments
2. Withdrawals
3. Revenues
4. Expenses
.

OWNER’S
• ASSETS • LIABILITIES
EQUITY
 The equation has two elements which equally divide the entity
into two parts. The left side represents what the entity owns.
On the other hand, the right side represents those that the
company owes.
 Accounting Identity – means that the equality must be
maintained throughout all transactions.
The equation shows that assets or properties of the
business are owing to outsiders (Liabilities) and to owner’s
(proprietor)
.

OWNER’S
• ASSETS • LIABILITIES
EQUITY

• The equation may also be expressed as:

• The equation means that out of the properties

of the business, the first to be paid must be the
debts to outsiders and any amount remaining
thereafter should go to the owner.
• Transactions always have a dual effect on the accounting
equation.
• Each transaction of the entity would have to affect at least two
accounts in order for the equation to remain balance.
• Such accounts may be on the same side (+Asset & -Asset) or on
both sides of the equation (+Asset & +Equity) or (+Asset &
+Liability)
 The accounting equation could also apply to personal
situation. Suppose you buy a car for P500,000, borrow
P400,000 from the bank, and pay the rest yourself. Try
to illustrate the accounting equation.

Assets = Liabilities + Owner’s Equity

Car = Accounts Capital

Payable-Bank
P500,000.00 400,000 P100,000.00
= +
 Manang Rosie’s Famous Barbeques
1. Initial Investment

Assets = Liabilities + Equity

Cash = Capital
(1) +P25,000
= 0 + (1) +P25,000

Take note of the dual effect of the transaction.

 Manang Rosie’s Famous Barbeques
2. Purchase of Equipment

Assets = Liabilities + Equity

Equipment
= Capital
(2) +P20,000
–P20,000 = +

Take note of the dual effect of the transaction.

 Manang Rosie’s Famous Barbeques
3. Purchase of inventories through credit

Assets = Liabilities + Equity

Inventories
= Capital
(3) +P10,000 (3) +P10,000
= +

Take note of the dual effect of the transaction.

 Manang Rosie’s Famous Barbeques
4. Payment of Expenses

Assets = Liabilities + Equity

Cash
= Expenses
(4) +P1,000
= + (4) +P1,000

Take note of the dual effect of the transaction.

 Manang Rosie’s Famous Barbeques
5. Sale of Barbeques

Asset = Liabilities + Owner’s

Equity
s
Cash A/R
= Revenues
(5) (5)
+P10,000 +P10,000 = + (5) +P20,000
 SUMMARY OF TRANSACTIONS
ASSETS LIABILITIES EQUITY
ACCOUNTS
CASH RECEIVABLE EQUIPMENT INVENTORIES = + CAPITAL REVENUES EXPENSES
1 +25,000 = +25,000
2 -20,000 +20,000 =
3 +10,000 = +10,000
4 -1,000 = -1,000
5 +10,000 +10,000 = +20,000
-5,000 = -5,000
14,000 10,000 20,000 5,000 = 10,000 + 25,000 20,000 -6,000
P49,000 P49,000