Accounting Equation

Lesson 4: The Accounting Equation
At the end of this chapter, the students should be able to:
1. Define the accounting equation;

2. Enumerate and explain the elements of the accounting equation;
and
3. Solve basic problems applying the accounting equation.
Basic Accounting Equation
The equation has two elements which equally divide the entity into two parts. The left
side of the equation represents what the entity own. On the other hand, the right side
represents those that the company owes.
Assets=liabilities+equitY
10 = 3 + 7
Assets
- are resources that an entity owns in order to derive some future benefits. These
assets are used by the company in its normal operations such as the manufacture of goods
or delivery of services. The main feature of these assets is their capability to give benefits to
the entity. These benefits are usually in the form of their ability to directly or indirectly
increase the inflow of cash to the entity or a reduction of its outflows. Some examples of
these assets are the following: cash, accounts receivable, inventories, equipment, land and
building, inventories.
Liabilities=assets-equity
3 = 10 - 7
Liabilities
-are claims of external parties from the entity. Basically, they are the
debts of the entity to external creditors. These debts do not always have to be
paid in money. Some of these liabilities are in the form of obligations to do some
service or even give something. These liabilities can take form in the following:
accounts payable, unearned revenue.
Equity=assets-liabilities 7 = 10 -
3
Equity
-it reflects the residual claims or net assets of the owners of an entity. This
is similar to the net worth part of the SALN of our public servants. Take note that
these are only residual claims of the owners since the creditors get their share of
the entity first before the owners are given their share. This is why the net worth
of individuals is computed by subtracting their liabilities from their assets.
Revenue
Less:expenses
RESULT OF OPERATION
Revenue>expenses=net income
10 > 8 = 2
Revenue<expenses= (net loss)
10 < 12 = (2)
Revenue
-the income generated from sale of goods or services, or any other use of capital or assets, associated with the main
operations of an organization before any costs or expenses are deducted.
Expenses
-an expense is the cost of operations that a company incurs to generate revenue. As the popular saying goes, “it
costs money to make money.”
Rules of Debit and Credit
Accounts Normal Balance/ To Decrease

To Increase
Assets Debit Credit

Liabilities Credit Debit
Capital Credit Debit
Withdrawals Debit Credit
Revenue Credit Debit
Expenses Debit Credit
Listed below are transactions of ABC Company during
its first month of operation. Indicate the effects of the
given transactions on each of the financial statement
elements. Put () outside the amount if decrease or to be
deducted.
Ex. Owner made an additional investment of 300,000 cash in the

business.
Assets = Liabilities + Equity Net Effect
300,000 No effect 300,000 Both sides are equal to

300,000
deducted.
Ex. Owner withdraw 10,000 cash for personal use.

(10,000) (10,000) Both sides are equal to -

10,000
Chart of Accounts
ASSETS LIABILITIES EQUITY
CAPITAL WITHDRAWALS REVENUE EXPENSES
Cash Accounts Payable A, Capital A, Withdrawals Sales Revenue Rent Expense
Accounts Notes Payable Salaries Expense

Receivable
Equipment Loans Payable Electricity Expense
Computer Water Expense
Aircon Business Permits

and Licenses
Expense
Furniture
deducted.
a. Mr. A invested 200,000 cash and furniture amounting to 50,000 to

open up ABC Company.
deducted.
b. Purchased equipment for cash amounting to 75,000.

deducted.
c. Purchased aircon through credit amounting to 25,000.

deducted.
d. Purchased computer through credit amounting to 30,000. Made

partial payment of cash 10,000 and incurred an accounts payable for
20,000 the balance
deducted.
e. Paid cash to the local government for business permit 9,000.

deducted.
f. Made sales amounting to 100,000 of which 50,000 is cash sales and

the remaining is a credit sales.
deducted.
g. Paid the electricity 3,000; rent 5,000; and water 1,500.

deducted.
h. Paid the accounts payable in transaction d.

deducted.
i. Collected the remaining credit sales in transaction f.

deducted.
j. Paid the salary of the employees 12,000.

Compute for the following.
a. Total assets
b. Total liabilities
c. Total revenue
d. Total expenses
e. What is the result of operation? How much?
f. Total equity

Accounting Equation

Uploaded by

Copyright:

Available Formats

Accounting Equation

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Accounting Equation

Uploaded by

Copyright:

Available Formats

Lesson 4: The Accounting Equation

At the end of this chapter, the students should be able to:

1. Define the accounting equation;

Accounts Normal Balance/ To Decrease

Assets Debit Credit

Ex. Owner made an additional investment of 300,000 cash in the

300,000 No effect 300,000 Both sides are equal to

Ex. Owner withdraw 10,000 cash for personal use.

(10,000) (10,000) Both sides are equal to -

ASSETS LIABILITIES EQUITY

CAPITAL WITHDRAWALS REVENUE EXPENSES

Cash Accounts Payable A, Capital A, Withdrawals Sales Revenue Rent Expense

Accounts Notes Payable Salaries Expense

Equipment Loans Payable Electricity Expense

Computer Water Expense

Aircon Business Permits

a. Mr. A invested 200,000 cash and furniture amounting to 50,000 to

b. Purchased equipment for cash amounting to 75,000.

c. Purchased aircon through credit amounting to 25,000.

d. Purchased computer through credit amounting to 30,000. Made

e. Paid cash to the local government for business permit 9,000.

f. Made sales amounting to 100,000 of which 50,000 is cash sales and

g. Paid the electricity 3,000; rent 5,000; and water 1,500.

h. Paid the accounts payable in transaction d.

i. Collected the remaining credit sales in transaction f.

j. Paid the salary of the employees 12,000.

You might also like