INTEGRATED ACCOUNTING LEARNING MODULE ATTACHMENT (DO NOT COPY)

THE ACCOUNTING EQUATION

LEARNING OBJECTIVESING OBJECTIVES:

BASIC ACCOUNTING EQUATION

ASSETS = LIABILITIES + EQUITY

ASSETS – economic resources you control that have resulted from past events and provide economic
benefits.

Control you don’t necessarily need to own the economic resource for it to be considered as your asset.
It means that you have exclusive right to enjoy those benefits and ability to prevent others from
enjoying the benefits.

Example 1 : Resource owned but not considered asset

You own a building. However, you do not have the right to use, sell, lease or transfer (or other similar rights
over) the building – another party does.

Analysis: The building is not your asset because you do not control the right over the economic benefits from it.

Example 2 : Resource not owned but considered asset.

You acquired a cellphone from Globe Telecom on a 2-year installment plan. The agreement states that if you
miss an installment payment, the telecommunications company can get the cellphone back.

Analysis: Upon taking possession, the cellphone becomes your asset, even if you do not actually own it yet until
fully paid. This is because you control the right over the economic benefits of the cellphone through exclusive
use.

Past events
The control over an economic resource have resulted from past events or transaction. Therefore, resources for
which control is yet to be obtained in the future do not qualify as assets in the present.
For example, you have an intention of purchasing a cellphone next year. Right now, the cellphone is not
yet your asset, it will become your asset after you purchase and take possession over it.

Note : Physical possession however is not always necessary for control to exist.
For example, the money you have deposited to a bank remains your assets despite the transfer of physical
possession. This is because you still control the right over the money by withdrawing it or spending it through
electronic means.

Economic Benefits
To be an asset, economic resource must have the potential to [provide you with economic benefits in at least
one circumstances. For examples, the economic resources can be:
1. Sold, leased, transferred or exchanged for other assets
2. Used singly or combination with other assets to produce goods or provide services
3. Used to enhance value of other assets
4. Used to promote efficiency and cost savings
5. Used to settle liability.

THIS FORM IS FOR INSTITUTIONAL PURPOSES ONLY!

LIABILITIES – present obligations that have resulted from past events and can require to give up economic
resource when settling them.

Obligations means duty or responsibility. It is either legal or constructive.

1. Legal Obligation – result from a contract, legislation, or other operation of law
2. Constructive Obligation – result from past actions that create a valid expectation on others that you will
accept and discharge certain responsibilities

Scenario 1: You purchased a cellphone on credit. You took possession over the cellphone but have not yet
paid the purchase price.

Analysis: You have a present obligation, and hence a liability because:

a. You have already purchased and received the cellphone and
b. As consequence, you are required to pay for the purchase price

Your obligation in scenario 1 is a legal obligation because it arises from a contract (i.e., purchase contract)

Scenario 2: Although not stated in the sales contract, you have a publicly-known policy of providing free
repair serviced for the goods your business sells. You have consistently honored this implied policy in the
past.

Analysis: You have a present obligation to provide free repair service for the goods you have already sold
because:
a. You have already taken an action by creating valid expectation on your customer that you will provide
free repair services and
b. As consequence, you will have to provide those free repair services.

Your obligation in scenario 2 is constructive obligation.

EQUITY - simply the residual interest of assets and liabilities. Other terms for equity are “capital”, “net assets”
and “net worth”

Illustration:
1 – On March 1,2022 You decided to put up a customized T-shirt printing business and have estimated that you
will be needing P50,000 as start-up capital. You withdrew P50,000 from your bank account and invest to start
the business.

Analysis:
Assets = Liabilities + Equity
P50,000 = 0.00 + P50,000

Journal Entry:
Date Particulars Debit Credit
March 1, 2022 Cash Php 50,000.00
Capital Php 50,000.00
To record the initial investment amounting to Php 50,000.00.

THIS FORM IS FOR INSTITUTIONAL PURPOSES ONLY!

Illustration:
2 – On March 1,2022 You decided to put up a customized T-shirt printing business and have estimated that you
will be needing P50,000 as start-up capital. You only have P40,000 from your bank account and borrow the
remaining P10,000 from your mother to start the business

Analysis:
Assets = Liabilities + Equity
P50,000 = P10,000 + P40,000

Journal Entry:
Date Particulars Debit Credit
March 1, 2022 Cash Php 40,000.00
Capital Php 40,000.00
To record the initial investment amounting to Php 40,000.00

March 1, 2022 Cash Php 10,000.00

Accounts Payable Php 10,000.00
To record the borrowings amounting to Php 10,000.00
or:
Date Particulars Debit Credit
March 1, 2022 Cash Php 50,000.00
Capital Php 40,000.00
Accounts Payable 10,000.00
To record the initial investment amounting to Php 40,000.00 and borrowings amounting
to P10,000.

Note : The equality of accounting equation must be maintained in all the accounting process of recording,
classifying, and summarizing.

EXPANDED ACCOUNTING EQUATION

ASSETS = LIABILITIES + EQUITY + INCOME - EXPENSES

OR

ASSETS = LIABILITIES + EQUITY +/- PROFIT/LOSS

Income – increases in economic benefits during the period in the form of increases in assets or decreases in
liabilities, that result in increase in equity, excluding those relating to investments by the business owner.

Expenses - decreases in economic benefits during the period in the form of decreases in assets or increases
in liabilities, that result in decrease in equity, excluding those relating to distributions to the business owner.

**the difference between income and expenses represent profit or loss**

➢ If income is greater than expenses, the difference is profit
➢ If income is less than expenses, the difference id loss.

Profit increases equity, while loss decreases equity.

THIS FORM IS FOR INSTITUTIONAL PURPOSES ONLY!

Illustration:
JENR Company, a reseller of luxury bags. On April 1, 2022 the company sold 5pcs of bags amounting
to P25,000 and the cost to sell the bags is P3,000 each, They also incurred selling and administrative
expenses amounting to P1,000. Using the data below as beginning balances.
Assets = Liabilities + Equity
P5,000 = P 800 + P4,200

JENR Company
Income Statement
For the month of April 2022

Sales Revenue/Income (Price x Quantity Sold) [P5,000 x 5 pcs] 25,000.00

Less : Cost of Goods Sold (Cost x Quantity Sold) [P3,000 x 5 pcs] (15,000.00)
Gross Margin 10,000.00
Less : Selling and Administrative Expenses (1,000.00)
Profit (Loss) 9,000.00

EXPANDED ACCOUNTING EQUATION:

Assets = Liabilities + Equity + Income - Expenses

P5,000 + P9,0000 = P800 + P4,200 + P25,000 - P16,000
or

Assets = Liabilities + Equity +/- Profit/Loss

P5,000 + P9,0000 = P800 + P4,200 + P9,000

Statement of Changes in Equity

Equity, Beginning 4,200.00
Add: Profit 9,000.00 Statement of Changes in Equity
Additional Investment Equity, Beginning 4,200.00
Less: Loss - Add: Income 25,000.00
Withdrawals - Additional Investments
Less: Expenses (16,000.00)
Equity, Ending 13,200.00
Withdrawals
Equity, Ending 13,200.00

BASIC ACCOUNTING EQUATION

Assets = Liabilities + Equity
P14,000 = P800.00 + P13,200

THIS FORM IS FOR INSTITUTIONAL PURPOSES ONLY!