FUNDAMENTALS OF
ACCOUNTANCY,
BUSINESS, AND
MANAGEMENT 1
1
ACCOUNTING
EQUATION
At the end of the lesson, you should be able to;
✔ explain the elements of accounting equation;
✔ solve exercises on accounting principles as applied in
various transactions;
✔ illustrate the accounting equation; and
✔ perform operations involving simple transactions
using the accounting equation.
ASSETS = LIABILITIES + OWNER’S EQUITY
In accounting, it is understood that every
business activity always has a two-sided effect
on the business. This two-sided effect is best
illustrated in the accounting equation.
This reflects the double-entry
bookkeeping which tells us that if we
add something from one side, we must
add the same amount to the other side
to keep them in balance.
Illustrative examples #1:
Jan 1: Mr. Antonio, the owner of Antonio Dental clinic, invested
₱500,000 cash to the business.
ASSETS = LIABILITIES + OWNER’S
EQUITY
DATE
JAN 1 ₱500,000 0 ₱500,000
Jan 2: Provided dental services to clients for cash for ₱20,000.
ASSETS LIABILITIES + OWNER’S
= EQUITY
DATE
JAN 2 ₱20,000 0 ₱20,000
Jan 5: Purchased equipment on account for ₱50,000.
ASSETS LIABILITIES OWNER’S
= + EQUITY
DATE
JAN 5 ₱50,000 ₱50,000 ₱0
Jan 6: Paid rent for the month, ₱5,000
ASSETS LIABILITIES OWNER’S
= + EQUITY
DATE
JAN 5 ₱5,000 0 ₱5,000
Illustrative Examples #2:
Mr. A, who is starting his Internet Café
business, has the following business
transactions from March 21-March 25, 2020.
Transaction 1 :
March 21: Mr. A made an initial investment of ₱500,000 to start
his business.
DATE TRANSACTION ASSETS (₱) = LIABILITIES + OWNER’S
(₱) EQUITY (₱)
March 21 Owner’s Initial 500,000 500,000
investment
Transaction 2 :
March 23: Mr. A purchased computer units at ₱200,000 on account,
meaning it is to be paid to the supplier upon delivery. But he made a down
payment of ₱50,000 on that day.
DATE TRANSACTION ASSETS (₱) = LIABILITIES + OWNER’S
(₱) EQUITY (₱)
March 21 Owner’s Initial 500,000 500,000
investment
Purchased office 200,000 200,000
23 equipment (50,000) (50,000)
(computer units)
on account
Paid a down
23 payment for the 150,000 150,000
office equipment
Transaction 3 :
March 24: Mr. A paid ₱10,000 for the rent of the place that he will
occupy for the business.
DATE TRANSACTION ASSETS (₱) = LIABILITIES + OWNER’S
(₱) EQUITY (₱)
March 21 Owner’s Initial 500,000 = 500,000
investment
23 Purchased office
equipment 150,000 150,000
(computer units) =
on account
24 Payment of rent +10,000; =
-10,000
Transaction 4 :
March 25: the computer units that were purchased on March 23 were
delivered. Mr. A paid the balance.
DATE TRANSACTION ASSETS (₱) = LIABILITIES + OWNER’S
(₱) EQUITY (₱)
March 21 Owner’s Initial 500,000 = 500,000
investment
23 Purchased office =
equipment (computer 200,000 200,000
units) on account
23 Paid a down =
payment for the (50,000) (50,000)
office equipment
24 Payment of rent +10,000; =
-10,000
25 Payment of
balance from (150,000) (150,000)
purchasing office
equipment
PRACTICE:
Transaction 5 :
March 26: Mr. A paid ₱10,000 to the computer technician who set
up the network connection for his business operation.
Transaction 6:
On the same day, he also paid the Internet service provider the
amount of ₱15,000 for the internet connection.
DATE TRANSACTION ASSETS (₱) = LIABILITIES + OWNER’S
(₱) EQUITY (₱)
March 21 Owner’s Initial 500,000 = 500,000
investment
23 Purchased office =
equipment (computer 200,000 200,000
units) on account
Paid a down =
payment for the (50,000) (50,000)
office equipment
24 Payment of rent +10,000; = (10,000)
-10,000
25 Payment of
balance from (150,000) (150,000)
purchasing office =
equipment
26 Payment for (10,000) = (10,000)
network
connection
Payment for (15,000) = (15,000)
internet provider
PRACTICE:
Transaction 7 :
March 27: Mr. A purchased office supplies amounting to ₱5,450.
DATE TRANSACTION ASSETS (₱) = LIABILITIES (₱) + OWNER’S
EQUITY (₱)
March 21 Owner’s Initial 500,000 = 500,000
investment
23 Purchased office =
equipment (computer 200,000 200,000
units) on account
Paid a down =
payment for the (50,000) (50,000)
office equipment
24 Payment of rent +10,000; - = (10,000)
10,000
25 Payment of balance =
from purchasing (150,000) (150,000)
office equipment
26 Payment for (10,000) = (10,000)
computer technician
Payment for internet (15,000) = (15,000)
connection
27 Purchased office (5,450) = (5,450)
EFFECTS ON THE ACCOUNTING EQUATION OF
DIFFERENT TRANSACTIONS
Show the effects on the accounting equation of
the following transactions. Write (+) for increase,
(–) for decrease, and NE for No Effect
ASSETS LIABILITIES CAPITAL
1. Owner invested cash + NE +
2. Purchased computer on account + + NE
3. Purchased air conditioning unit in cash NE NE NE
4. Owner withdrew cash for personal use - NE -
5. Paid the account in purchasing the computer - - NE
6. Borrowed money from bank + + NE
7. Paid partially the loan from banks - - NE
ASSETS LIABILITIES CAPITAL
8. The company purchases land by
paying half in cash and signing a note + + NE
9. Purchased supplies on credit + + NE
10. The owner contributes her personal
truck into the business.
+ NE +
