ACCOUNTING

EQUATION
OBJECTIVES:

• K: Define terms related to accounting

equation;
• S: Solve problems using the accounting
equation; and
• A: Show appreciation in solving problems using
the accounting equation
Assets = Liabilities + Capital

• Assets. These are the resources owned by

the business that will provide future benefits.

• Examples: cash, accounts receivable, supplies,

equipment, vehicles, office furniture, land, and
building
Liabilities. These are the
rights of the creditors that
represent the debt of the
business.

Examples: accounts payable,

notes payable, loans payable,
and interest payable.
Owner’s Equity/ Capital. This
refers the rights of the owners
in the business. This is the
amount by which the business
assets exceed business liabilities

Example: if the photocopying

equipment is valued at P 80,000
and the loan amount due is P
30,000, the amount of owner’s
equity in this case is P 50,000.
Four elements that affect equity:
a. INVESTMENT is an asset or item
acquired with the goal of generating
income or appreciation.
b. WITHDRAWAL occurs when funds are
removed from an account for personal
use.
c. REVENUE is the total amount of
income generated by the sale of goods or
services related to the company’s primary
operations.
d. EXPENSES is the cost of operations
that a company incurs to generate
revenue.
Definitions in business
of other terms
• 1. Business transactions. This refers to
an economic event or condition that
directly changes an entity’s financial
condition or directly affects its results
of operations. Transactions are always
looked upon from the business point
of view.

• 2. Cash. This includes money in hand,

petty cash, bank account balance,
customer checks, and marketable
securities
• 3. Accounts receivable. This refers
to accounts a business has the right
to receive because it has delivered
a product or service.

• 4. Supplies. A current asset

representing the cost of supplies on
hand at a point in time.

• 5. Equipment. This is a noncurrent

or long-term asset account which
reports the cost of the equipment
• 6. Vehicles. This is defined as a long-
term asset account that reports a
company's cost of automobiles,
trucks, etc.

• 7. Office Furniture. This refers to

furniture and fixtures that are larger
items than movable equipment that
are used to furnish an office.

• 8. Land. This is defined as the ground

the company uses for business
operations; it includes ground on
which the company locates its
headquarters or land used for outside
storage space or as a parking lot.
Unlike a majority of fixed assets, land
is not subject to depreciation.
• 9. Building. This is a noncurrent or long-
term asset account which shows the
cost of a building (excluding the cost of
the land)

• 10. Accounts Payable. This refers to an

account within the general ledger that
represents a company's obligation to
pay off a short-term debt to its
creditors or suppliers.

• 11. Notes Payable. This refers to a

general ledger liability account in which a
company records the face amounts of
the promissory notes that it has issued.
... the amount not due within one year of
the balance sheet date will be a
noncurrent or long-term liability.
• 12. Loans Payable. This refers to charges interest and is usually
based on the earlier receipt of a sum of cash from a lender.

• 13. Interest Payable. This is the interest expense that has been
incurred (has already occurred) but has not been paid as of the date
of the balance sheet.

• 14. Utilities Expense. This is the cost incurred by using utilities such
as electricity, water, waste disposal, heating, and sewage

• 15. Withdrawals. This also refers to the drawdown of an owner's

account in a sole proprietorship or partnership. In this situation, the
funds are intended for personal use. The withdrawal is not an
expense for the business, but rather a reduction of equity
Assets = Liabilities + Owner’s Equity
• The accounting equation must always
balance. The peso amount on the left
side of the equation should always
equal to the peso amount on the right
side of the equation.
• If assets increase, liabilities and/or
owner’s equity must increase by the
same amount.
• If assets decrease, liabilities and / or
owner’s equity must also decrease.
• An increase in an asset may also
have a corresponding decrease in
another asset
• or an increase in a liability may also
have a corresponding decrease in
another liability
ILLUSTRATIVE EXAMPLES:
• Business transaction 2: Purchased supplies on account, P 20,000.
• Business transaction 3: Issued partial payment of P 2,000.00 for
supplies bought on account.
• Business transaction 4: Issued payment of P 1,000 for utilities.
• Business transaction 5: Cash purchased of office furniture, P3,000.
• Business transaction 6: Mr. Agor, the owner-manager of the business
issued a promissory note for the remaining balance of transaction no. 2
that was long due.
Assets = Liabilities + Owner’s Equity
• Business transaction 1: Mr. Agor invested
P100,000 to start a printing business.
• Business transaction 2: Purchased
supplies on account, P 20,000.
• Business transaction 3: Issued partial
payment of P 2,000.00 for supplies
bought on account.
• Business transaction 4: Issued payment of
P 1,000 for utilities.
• Business transaction 5: Cash purchased of
office furniture, P3,000.
• Business transaction 6: Mr. Agor, the
owner-manager of the business issued a
promissory note for the remaining balance
of transaction no. 2 that was long due.
 Always remember the
following:
• 1. Assets are resources owned by the business.
• 2. Liabilities are obligations by the business.
• 3. Equity is the residual interest of the owner of
the business. Meaning, any assets left after
paying liabilities is the right of the owner of the
business
• Four elements that affect equity:
• (1) Investment;
• (2) Withdrawal;
• (3) Revenue, and;
• (4) Expenses.
What Have I Learned
• On October of the current year, Ms. D. Diaz started an
auto repair business.
• 1. She invested P 200,000 to start an auto repair
business.
• 2. She bought repair equipment on credit, P 100,000.
• 3. Bought shop supplies for cash, P 62,000.
• 4. Paid partial on equipment bought on account, P
60,000
• 5. Received a bank loan for business use, P 100,000.
• 6. Customers pay cash for auto repairs rendered, P 25,000
• 7. Repair services rendered on account, P 50,000.
• 8. Paid a month’s rent, P 10,000.
• 9. Collects partial from customers’ account, P30,000.
• 10. Pays the salaries and wages of laborers, P15,000.
• 11. Billed a customer, P6,000; P 2,000 was partially received.
• 12. Supplies purchased, P 15,000 and P5,000 was partially
paid.
• 13. Shop supplies used and paid, P 18,000
• 14. Diaz withdrew P 20,000 for personal use