THE ACCOUNTING EQUATION

LESSON 3-1 EFFECTS OF OWNER’S INVESTMENT/WITHDRAWAL AND CASH ACQUISITION OF

ASSETS
Lesson Objectives

• identify the effects of transactions on

the assets and the owner’s equity as a
result of owner’s
investment/withdrawal and cash
acquisition of assets.

Give the effect of the following transactions on the assets and owner’s equity:
Transaction Assets Liabilities Owner’s Equity Analysis
1. Owner invests cash Assets Capital Cash increases because
in the business. increase increases owner invests cash in the
business which is an asset.
Owner’s interest in the
business increases as
represented by an
increase in capital.
2. Owner invests Assets Capital Assets increase because
furniture increase increases owner invests furniture in
the business which is an
asset. Owner’s interest in

the business increases

because of the investment
as represented by an
increase in capital.
3. Owner withdraws Assets Capital Assets decrease because
cah for personal use. decrease decreases owner withdraws cash
which is an asset.
Owner’s interest in the
business decreases
because of the withdrawal
as represented by a
 decrease in capital.
4. Owner purchases Assets Supplies increase because
supplies using cash. increase/ of the purchase but cash
Assets decreases because of the
decrease payment. Since both are
assets, one asset increases
while another asset
correspondingly decreases.

5. Owner gets cash Assets Cash increases because of

refund for returning increase/ the refund but supplies
damaged supplies Assets decrease because of the
bought on cash. decrease return. Since both are
assets, one asset increases
while another asset
correspondingly decreases.

6. Owner purchases Assets Furniture increases

furniture using cash. increase/ because of the purchase
Assets but cash decreases
decrease because of the payment.
Since both are assets, one
asset increases while
another asset
correspondingly decreases.

7. Owner makes Assets Capital Assets increase because

additional cash increase increases owner invests additional
investment. cash in the business which
is an asset. Owner’s
interest in the business
increases because of the
investment as
represented by an
increase in capital.
8. Owner withdraws Assets Capital Assets decrease because
supplies for personal decrease decreases owner withdraws supplies
use. from the business which is
an asset. Owner’s interest
in the business decreases
because of the withdrawal
which is represented by a
decrease in capital.
 Test Your Understanding

Give an example of a transaction for each of the following:

1. Simultaneous increase and decrease in asset.

2. Increase in both assets and capital.
3. Decrease in both assets and capital.

DRILL 1

Give the effect of the following transactions on the assets of the business. Put a check mark under the
appropriate column.
NO. TRANSACTION INCREASE DECREASE NO EFFECT
1 Owner invested equipment.
2 Bough office computer on account.
3 Paid the office computer in number 2.
4 Owner withdrew cash.
5 Owner withdrew furniture.

DRILL 2
Give the effect of the following transactions on the owner’s equity account. Put a check mark under
the appropriate column.
NO. TRANSACTION INCREASE DECREASE NO EFFECT
1 Cash investment of owner.
2 Non-cash investment of owner.
3 Cash withdrawal of owner.
4 Non-cash withdrawal of owner.
5 Purchase of supplies.

DRILL 3
Give the effect of the following transactions on the assets and the owner’s equity.
NO. TRANSACTION ASSETS OWNER’S EQUITY
1 Owner invested cash and computer.
2 Owner purchased furniture using cash.
3 Owner withdrew cash for personal use.
4 Owner returned supplies bought using cash.
5 Purchase of supplies for personal use.
 LESSON 3-2 EFFECTS OF INCOME EARNED AND PAYMENT
OF EXPENSES

•
identify the effects of transactions on the
assets and owner’s equity as a result of
income earned and payment of expenses

Give the effect of the following transactions on the assets and owner’s equity:
Transaction Assets Liabilities Owner’s Equity Analysis
1. Rendered Assets Capital increases Assets increase because
serviced for cash increase owner collected cash as a
result of services rendered.
Owner’s equity increases
because the business earned
income for services
rendered.
2. Rendered Assets Capital increases Assets increase because of
services on credit increase account collectible from the
customer which is an asset as
a result of services rendered.
Likewise, owner’s equity
increases because of income
earned from services
rendered.
3. Paid telephone Assets Capital Assets decrease because
bill decrease decreases owner pays cash for the
telephone bill. Owner’s
equity decreases because the
telephone bill represents
utilities expense which
decreases capital.

Test Your Understanding

Give examples of the following transactions:

1. Transactions that increase the assets of a business
2. Transactions that increase the owner’s equity
 3. Transactions that increase both assets and owner’s equity
4. Transactions that decrease the assets of a business
5. Transactions that decrease the owner’s equity
6. Transactions that decrease both assets and owner’s equity
7. Transactions that increases one asset but decreases another asset

DRILL 4
Give the effect of the following transactions on the assets and owner’s equity:
NO. TRANSACTION ASSETS OWNER’S EQUITY
1 Customer paid cash for services rendered
2 Paid employee’s salaries
3 Received a note for services rendered
4 Rendered services on credit
5 Paid electricity bill received

LESSON 3-3 EFFECTS OF TRANSACTIONS ON THE ACCOUNTING EQUATION

• identify the effects of transactions on the assets, liabilities, and owner’s equity as a
result of different transactions affecting the accounting equation
• analyze the different transactions in the service type of business

The following pages will illustrate the effect of transactions on the accounting equation. The
abbreviations in the examples shall mean the following:

INC – Increase
DEC – Decrease
NC – No Change
Transaction Assets Liabilities Capital Analysis
1. Owner invests INC NC INC An entity separate and distinct from the
cash. owner is created. The cash investment of
the owner increases the assets of the
business and the capital of the owner.
2. Owner invests INC NC INC The equipment increases the assets of the
equipment. business. since this is an investment of the
owner, capital of the owner increases
correspondingly.
3. Renders INC NC INC The business earned an income by
services for cash rendering services and collecting revenues
in cash. The effect in the accounting
equation is an increase in cash for the cash
collected and an increase in capital as
revenue increases capital.
4. Renders INC NC INC Assets increase by the amount of revenue
services on credit expected to be collected from the
customer to whom the services were
rendered. Capital also increases since
rendering of services represents revenue.
5. Collects INC/DEC NC NC Assets increase as there is cash inflow in
account in the amount of the collection. However,
transaction assets correspondingly decrease with the
#4 amount of the collection as the accounts
receivable, an asset account, will decrease.
This is because the amount the customer
owes has already been collected.
6. Purchases INC INC NC Supplies increase the assets of the
supplies on credit business and the liabilities correspondingly
increase as the supplies were bought on
account or credit.
7. Returns DEC DEC NC Assets decrease with the amount of
defective supplies supplies returned. Liabilities
correspondingly decrease as the
returned supplies decrease the amount
owed.
8. Pays the DEC DEC NC The transaction is a payment of account.
supplies Since there is cash outflow representing
bought on the payment of an existing liability, assets
account or decrease in the amount of cash paid and
credit liabilities decrease in the amount of the
liability on supplies paid.
9. Borrows cash INC INC NC Cash increases the assets of the business
issuing a note as there is an inflow of cash because the
business borrowed money. Notes payable
increases the liabilities of the business as it
represents an obligation on the part of the
business to pay at a future date.
10. Purchases INC/DEC NC NC Land increases the assets of the business
land using cash but cash correspondingly decreases due to
the payment for the purchase of land.
11. Pays utilities DEC NC DEC Payment represents cash outflow
 expense for the decreasing the assets of the business.
month Expenses decrease the capital as they have
opposite effect on income.
12. pays the note DEC DEC NC The transaction is a payment of liability.
in full Since there is cash outflow representing
the payment of the note, assets decrease
in the amount of cash paid and liabilities
decrease in the amount of the notes
payable.

The following details will include the amount and the account affected in illustrating the effects on the
accounting equation. Notice that the accounting equation is always balanced in every transaction such
that assets are always equal to liabilities and capital.
Transaction Assets Liabilities Capital Analysis
1. Ms. Go invests INC NC INC The ₱800,000 cash
cash. ₱800,000 CASH Ms. Go, Capital investment of Ms. Go
₱800,000 ₱800,000 increases the cash of the
business and the capital of
the owner.
2. Ms. Go invests INC NC INC The ₱50,000 equipment
equipment. Equipment Ms. Go, Capital increases the assets of the
₱50,000 ₱50,000 ₱50,000 business. since this is an
investment of Ms. Go, her
capital correspondingly
increases.
3. Renders INC NC INC The business earns ₱25,000
₱25,000 services CASH Service Income by rendering services and
for cash ₱25,000 ₱25,000 collecting the revenues in
cash. The effect in the
accounting equation is an
increase of ₱25,000 in cash
for the cash collected and a
₱25,000 increase in capital as
revenue increases capital.
4. Renders INC NC INC Assets increase by ₱9,000
₱9,000 services Accounts Service Income which is the amount of
on credit Receivable ₱9,000 revenue expected to be
₱9,000 collected from the customer
to whom the service was
rendered. Capital increases
by ₱9,000 since rendering of
service represents revenue.
5. Collects INC NC NC Assets increase by ₱9,000 as
account in Cash there is cash inflow in the
transaction #4 ₱9,000 amount of the collection.
However, assets
correspondingly decrease by
DEC an equal amount since the
Accounts accounts receivable, which is
Receivable an asset account, decreases.
₱9,000 This is because the amount
the customer owes has
already been collected.
6. Purchases INC INC NC Supplies increase the assets
₱1,000 supplies Supplies Accounts of the business by ₱1,000.
on credit ₱1,000 Payable Liabilities correspondingly
₱1,000 increase by ₱1,000 as the
supplies were bought on
account or credit.
7. Returns ₱120 DEC DEC NC Assets decrease by ₱120
defective supplies Supplies Accounts which is the amount of
₱120 Payable supplies returned. Liabilities
₱120 correspondingly decrease by
₱120 as the returned
supplies decrease the
amount owed.
8. Pays the DEC DEC NC The transaction is a payment
supplies bought Cash Accounts of an account. Supplies
on account or ₱880 Payable purchased in transaction #^
credit ₱880 amount to ₱1,000. However,
defective supplies in the
amount of ₱120 was
returned in transaction #7.
Hence, the remaining liability
to be paid is ₱880. There is a
cash outflow of Php880 upon
payment. Because of this,
assets decrease by ₱880.
Likewise, liabilities decrease
in the same amount as the
₱880 liability on supplies was
paid.
9. Borrows INC INC NC Cash increases the assets of
₱90,000 cash Cash Notes Payable the business because the
issuing a note ₱90,000 ₱90,000 business borrowed ₱90,000.
Notes payable increases the
liabilities of the business by
 ₱90,000 as it represents an
obligation on the part of the
business to pay the ₱90,000
at a future date.
10. Purchases INC NC NC Land increases the assets of
₱500,000 land Land the business by ₱500,000.
paying cash ₱500,000 Cash correspondingly
decreases by ₱500,000 with
DEC the cash paid for the purchase
Cash of the land.
₱500,000
11. Pays utilities DEC NC DEC Payment represents cash
expense for the Cash Utilities outflow decreasing the assets
month ₱800 ₱800 Expense of the business by ₱800.
₱800 Likewise, expenses decrease
the capital by ₱800 as they
have opposite effect on
income.
12. Pays the note DEC DEC NC The transaction is a ₱90,000
in full Cash Notes Payable payment of liability. Since
₱90,000 ₱90,000 there is cash outflow
representing the payment of
the note, assets decrease by
₱90,000. Liabilities likewise
decrease by ₱90,000 which is
the amount of cash
settlement for the notes
payable.

Give an example of transaction under of the following:

1. Increase in both assets and liabilities
2. Decrease in both assets and liabilities

DRILL 5
Give the effect of the following transactions on the accounting equation:
1. Owner invested cash in the business
2. Rendered services for cash
 3. Purchased supplies for cash
4. Rendered services on account to Ms. Go.
5. Purchased furniture on account from Linden Teak
6. Collected payment from Ms. Go.
7. Partial payment made to Linden Teak
8. Owner invested computer in the business
9. Paid Linden Teak in full
10. Owner withdrew cash for personal use
11. Owner withdrew supplies for personal use
12. Received PLDT bill for telephone services
13. Paid PLDT bill for telephone services
14. Rendered services to Mr. Sy on account
15. Received note for services rendered to Ms. Ann
16. Ms. Ann paid interest for the note
17. Ms. Ann paid the note in full
18. Mr. Sy issued note in lieu of his account
19. Received partial payment from Mr. Sy
20. Paid electricity bill to MERALCO

DRILL 6
Give the effect of the following transaction on the accounting equation:

On May 11, 2016, Doña Pura opens Pura Collection Services. On the transaction summary table below,
indicate the effect of each transaction on each account. Put “+” to signify increase or “-“ to signify
decrease. Indicate the amount of increase or decrease for each account. The first one is done for you.
Owner’s
Transaction Assets Liabilities Equity
Cash Accounts Supplies Accounts Notes Pura, Capital
Receivable Payable Payable
1. Doña + ₱60,000 + ₱60,000
Pura invested
₱60,000 in the
business.
2. Bought ₱1,500
worth of supplies for
cash.
3. Borrowed ₱50,000
from Doña Tekla
4. Cash services
rendered to Ms. Ko,
₱25,000
5. Issued a note for
the amount
borrowed from Doña
Tekla
6. Services rendered
to client on account,
₱5,000
7. Settled the note
with Doña Tekla
8. Paid ₱12,000
worth of personal
funds for a Palawan
vacation
9. Made personal
withdrawal, ₱10,000
10. Hired office
secretary with
monthly salary
of ₱13,000
11. Collections from
various clients
amounting to
₱30,000 for services
rendered
12. Returned ₱200
worth of defective
supplies bought using
cash
13. Invested
additional cash,
₱24,000
14. Full collection of
account from all
clients, ₱100,000
 Let’s Have Exercises

Exercise 1
Selected transactions from Fat So Slimming Center are presented below. Give the effect of the
following transactions on the assets, liabilities, and owner’s equity.
1. Ms. Fat So invested cash and slimming equipment in the business.
2. Purchased office supplies on credit.
3. Purchased office furniture on account.
4. Paid one year advance rent.
5. Ms. Fat So withdrew cash for personal use.
6. Returned defective office supplies.
7. Bought slimming equipment for cash.
8. Paid furniture in full.
9. Purchased a van for use in the business, paying 10% down payment and the remaining balance
after 30 days.
10. Paid light, water and telephone bill.
11. Collected customer account.
12. Paid the balance of the van in full.
13. Received note from customer.
14. Ms. Fat So invested additional cash in the business.
15. Customer paid the note.
16. Additional investment of Ms. Fat So.
17. Paid office supplies in full.
18. Cash withdrawal of owner.
19. Ms. Fat So withdrew the slimming equipment.
20. Cash collections for customers.

Exercise 2
Selected transactions from Fresh Breath Dental Clinic are presented below. Give the effect of the
following transactions on the three elements of the balance sheet:
1. Purchased equipment by paying cash.
2. Paid monthly rent.
3. Bought supplies on credit.
4. Additional investment of owner.
5. Charged customers for dental services rendered.
 6. Paid creditor on account.
7. Received payment from customers on account.
8. Received cash for dental services rendered.
9. Paid salaries for the week.
10. Purchased equipment paying 30% down payment and the remaining balance in 3 installments.
11. Personal withdrawal of owner.
12. Paid first installment for the equipment.
13. Paid utilities for the month.
14. Owner paid second installment from his personal checking account.
15. Customer cannot pay his account but issued a note for the account.
16. Called the equipment company to inform them that payment for the third installment will be
delayed.
17. Collection of customer account.
18. Payment of the third installment for the equipment.
19. Received payment for the note.
20. Paid the supplies bought on credit.

Exercise 3
On the transaction summary below, indicate the effect of each transaction on each account. Put “+” if
the account has increased or “-“ if the account has decreased. Put the amount of increase or decrease
for each account.
Assets Liabilities Owner’s
Transaction Equity
Cash Accounts Furniture Accounts Loan Toad,
Receivable and Fixture Payable Payable Capital
1. Mr. Toad invested
₱600,000 in the business.
2. Bought ₱10,000
worth of furniture on
account.
3. Loaned ₱80,000 from
May Bank.
4. Cash services
rendered to Ms. Tan,
₱10,000.
5. Paid the loan with May
Bank with ₱2,000
interest.
6. Services rendered to
Mr. Ty on account,
 ₱6,000.
7. Collected the account
from Mr. Ty in full.
8. Paid ₱25,000 of office
funds for a vacation in
Batanes.
9. Made additional
investment of ₱20,000.
10. Hired an executive
assistant with monthly
salary of ₱16,000.
11. Collections from
various clients in the
amount of ₱50,000 for
services rendered.
12. Returned ₱2,000
worth of defective
furniture bought on
account.
13. Made cash
withdrawal, ₱24,000.
14. Full collection from
clients, ₱80,000, for
services rendered.

Exercise 4
Selected transactions from Ogly Skin Clinic are presented below. Give the effect of the following
transactions on the three elements of the balance sheet. Give the accounts affected and the amount
of increase or decrease. The first one is done for you.
1. Dr. Dy invested ₱200,000 cash in the business.
Cash – increase, ₱200,000
Dy, Capital – increase, ₱200,000
2. Purchased ₱20,000 worth of furniture from Ace on account.
3. Dr. Dy withdrew ₱15,000 cash for personal use.
4. Bought computer costing ₱65,000 using cash.
5. Paid ₱2,000 interest on bank loan.
6. Returned defective furniture to Ace, ₱7,000.
7. Invested in a truck costing ₱360,000 for office use.
8. Returned defective chair costing ₱2,400 bought using cash.
9. Bought ₱1.800 worth of supplies for office use on account.
 10. Borrowed money from Buko Rural Bank, ₱500,000.
11. Paid messenger’s salary, ₱6,000.
12. Paid Ace in full, ₱13,000.
13. Received ₱8,000 note from customer.
14. Rendered services for cash, ₱4,500.
15. Purchased ₱800 worth of supplies on account.
16. Paid ₱25,000 to Buko Rural Bank.
17. Customer paid the note, ₱100,000.
18. Paid utilities for the month, ₱7,899.
19. Dr. Dy withdrew ₱1,200 worth of supplies.
20. Rendered delivery services on account, ₱5,600.

EXERCISE 5
Selected transactions are presented below. Give the effect of the following transactions on the three
elements of the balance sheet. Give the accounts affected and the amount of increase or decrease.

1. Purchased equipment, paying cash of ₱46,000.

2. Paid monthly rent, ₱15,000.
3. Bought supplies on credit, ₱1,900.
4. Owner invested furniture, ₱16,000.
5. Cash received from customer, ₱33,000.
6. Paid creditor on account, ₱6,000.
7. Received payment from customers on account, ₱14,000.
8. Owner withdrew ₱23,000.
9. Paid salaries for the month, ₱16,000.
10. Purchased equipment, costing ₱100,000, paying 25% down payment and the remaining balance
in 5 installments.
11. Personal withdrawal of owner, ₱5,000.
12. Paid first installment for the equipment.
13. Paid utilities for the month ₱6,700.
14. Owner issued his personal check in payment for the equipment’s second installment.
15. Customer could not pay his ₱10,000 account but issued a note for the amount.
16. Called National Bookstore to order office supplies costing ₱3,500.
17. Customer paid the note.
18. Payment of the third installment for the equipment.
19. Paid the supplies bought on credit.
20. Rendered services on account, ₱4,000.