The Accounting Equation
An Introduction
1
All businesses have three parts to their
financial makeup:
• The things or property that the company owns.
We call these things ASSETS.
• The money that the company owes to other
people.
We call these obligations LIABILTIES.
• The claim of the owner of the business to the
Assets after the Liabilities are paid.
We call this claim OWNER’S EQUITY (or just
EQUITY).
2
These three parts ALWAYS have the
same relationship to each other. We
call this relationship the
Accounting Equation
Assets = Liabilities + Equity
3
The Accounting Equation could also apply to a
personal situation. Suppose you buy a car for
P 50,000, borrow P40,000 from the bank, and pay
the rest yourself. Here’s the result:
Accounting Equation
Assets = Liabilities + Equity
P50,000 = P40,000 + P10,000
4
ASSETS are the
RESOURCES OWNED BY A BUSINESS .
Here are some types of assets that might
be owned by a business company:
Cash Notes
Accounts
Receivable
Receivable
Inventories ASSETS Land
Intangible Buildings
Assets
Equipment
5
LIABILITIES are the
CREDITOR’S CLAIMS ON ASSETS.
• Creditors are the people or companies to whom a business
owes something (like money).
• Here are some types of liabilities that a company might owe:
Accounts Notes
Payable Payable
LIABILITIES
Unearned
Revenues
6
EQUITY is the OWNER’S CLAIM ON ASSETS
In a business EQUITY is composed of four
parts that either increase or decrease equity:
EQUITY
CAPITAL: WITHDRAWALS: REVENUES: EXPENSES:
What the
owner puts − What the owner
takes out of the
+ What the
company − What the
company
into the business receives for pays to
business sales operate the
business.
INCREASE DECREASE INCREASE DECREASE
7
Sometimes we expand the Accounting
Equation to show all the Equity
components. This is called the
EXPANDED ACCOUNTING EQUATION.
This equation must
ALWAYS BE IN
BALANCE
8
SUMMARY:
Accounting Equation
Assets = Liabilities + Equity
3
USING THE EQUATION
• Accounting Identity- equality must be maintained throughout all transactions
(Mathematics “Identity Property” both side of an equation should always be
equal)
• Dual Effect- Each transaction of the entity would have to effect at least two
accounts in order for the equation to remain in balance.
Accounts may be in:
SAME SIDE Ex. (+Asset, -Asset)
Both Sides Ex. (+Asset, + Equity) or (+Asset, +Liability)
Assets invested by the owner
July 1 - Paolo Reyes started a delivery service on July 1, 2013. The following transactions occurred during the month of
July. He invested PHP800,000 cash and Cars amounting to PHP200,000
Borrowings from the bank
July 2 – Reyes borrowed PHP100,000 cash from PNB for use in his business.
Asset purchased for cash
July 7 – Bought tables and chairs from Orocan and paid PHP45,000 cash
Assets purchased on account
July 15 – Various equipment were purchased on account from Fortune for PHP55,000
Cash withdrawal by the owner
July 18 – Reyes made a cash withdrawal of PHP5,000 for personal use
Payment of liability
July 20 – The account due to Fortune was paid in cash
The following table summarizes the effects of these transactions on the accounting
equation:
Received cash for revenue earned
July 21 – A customer hired the services of Reyes. Cash of PHP15,000 was received from the customers.
Paid cash for expenses incurred
July 22 – Cash was paid for the following : gas and oil, PHP500 and car repairs, PHP1,000.
Revenue rendered on account
July 24 – Another customer hired the services of Reyes and promised to pay PHP16,000 on July 31.
Paid for expenses incurred
July 25 – Paid PHP500 for telephone bill.
Revenue earned with a down payment, balance on account
July 27 – Another customer hired the services of Reyes. A bill was issued to them for PHP20,000, 50% of which
was collected
Customer’s account collected in cash
July 30 – The customer on July 24 paid 50% of his account in cash.
Paid cash for expenses incurred
July 31 – Paid PHP10,000 for rental of office space, and salaries of PHP9,000
END DISCUSSION
For each transaction, tell whether the assets, liabilities and equity will increase (I), decrease
(D) or is not affected (NE).
1. The owner invested cash of PHP150,000 or the business earned PHP150,000 cash from providing services.
2. Purchased equipment at PHP20,000 for cash.
3. The owner withdrew cash of PHP112,500 or the business incurred PHP112,500 expenses and paid in cash.
4. The company purchased supplies on account PHP 5,000.00
5. The owner withdrew cash of PHP15,000 or the business incurred PHP15,000 expenses and paid in cash.
6. Paid liabilities worth PHP53,000.
7. The owner withdrew supplies worth PHP8,000 or the business used supplies worth PHP8,000.
Bal.
SEATWORK-Deadline –May 16, 2023
1. Page 135-136 – Individual Activity
2. Page 137-145- Summative
Assessment
I. Multiple Choice- No. 1-9
II. Exercises – A, B, C, D, E
III. Problem Solving- Letter C. Only
