Fabmi W3
Fabmi W3
Fundamentals of Accountancy,
Business and Management 1
Third Quarter – Module 3
THE ACCOUNTING
EQUATION
MELC: Illustrate the accounting equation and perform operations involving
simple cases with the use of accounting equation.
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PART 1: INTRODUCTION
DISCUSSION OF CONCEPTS
From the large, multi-national companies down to the corner small business, every business
transaction will have an effect on a company's financial position. The financial position of a company
is measured by the following items:
These are the building blocks of the basic accounting equation. The accounting equation is:
For Example:
A sole proprietorship business owes P300, 000 and you, the owner personally invested P500,
000 of your own cash into the business. The assets owned by the business will then be
calculated as:
P300, 000.00 (what it owes) + P500, 000.00 (what you invested) = P700, 000.00 (what the company has in
assets)
For Example:
A business owes P850, 000 and stockholders (investors) have invested P1, 100, 000 by buying
stock in the company. The assets owned by the business will then be calculated as:
P850, 000 (what it owes) + P1, 100, 000 (what stockholders invested) = P1, 950, 000 (what the company has in assets)
Account is a descriptive storage unit used to collect and store information of similar nature.
The accounting equation “assets equal liabilities plus equity” perfectly captures the major
accounts. These major accounts which also happen to be the main classification of accounts, are
assets, liabilities, equity. Owner’s equity includes revenues and expenses. An account is an
individual accounting record of the movements (increases and decreases) in specific accounts.
Chart of Accounts is a listing of all the accounts and is usually tailored to the operations
of the business. It functions as a guide to the accountant or the bookkeeper in ensuring uniformity
of and consistency in the use of all the accounts in recording business transactions.
▪ ASSETS
✓ CURRENT ASSETS
Example:
✓ NON-CURRENT ASSETS
Assets that do not meet the criteria to be classified as current. Hence, they are long-term
in nature – useful for a period longer than 12 months or the company's normal
operating cycle.
Example:
2. Land – land area owned for business operations (not for sale)
▪ LIABILITIES
✓ CURRENT LIABILITIES are debts that must be repaid in less than 12 months.
Notes Payable – this represents the amount of money owed by the business
to the supplier or creditor evidenced by a promissory note.
▪ EQUITY
✓ Net Income - an overall measure of performance for the period which equals
revenues less expenses.
In other situation, we encounter The Expanded Accounting Equation by including two more
elements – income and expenses. The expanded accounting equation shows all the financial statement
elements. The expanded accounting equation is as follows:
Income – are increases in economic benefits during the period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than those
relating to investments by the business owners.
While, Expenses – are decreases in economic benefits during the period in the form of outflows
or depletions of assets or increases of liabilities that result in decreases in equity, other than those
relating to distributions to the businessowners.
In addition, the difference between income and expenses represents profits or loss.
➢ If income is greater than expenses, the difference is profit (“profit” means “kita” or “tubo” in
Filipino)
➢ If income is less than expenses, the difference is loss (“loss” means “lugi” in Filipino)
Illustration:
During the period, you earned income of P10, 000 and incurred expenses of P6, 200.
At the end of the period, your total assets increased from ₱2,000 to ₱5,000 and your total
liabilities decreased from P1, 200 to P400.
Your expanded accounting equation is as follows:
We can also derive the following variation from the equation below:
Your profit for the period is P3, 800 (P10, 000 income minus P6, 200 expenses). There is profit
because income is greater than expenses.
or
Your basic accounting equation as of the end of the accounting period is as follows:
Notice that regardless of the form or variation, the accounting equation (basic or expanded) remains
balance.
PART 2: ACTIVITIES
Activity I: TYPE OF ACCOUNTS
DIRECTIONS: Identify and arrange the following items from Table 1 to Table 2
with appropriate type of accounts (Assets, Liabilities, or Owner’s Equity).
Table 1
Prepaid rent Cash Maria, Capital Maria, Drawing
Mortgage payable Unearned Revenues Building Net worth of the business
Unused supplies Loan Payable Assets minus Service Income
Owner’s Equity
Table 2
Assets Liabilities Owner’s Equity
DIRECTIONS: On the space provided, write the letter that corresponds to each of the
given statements.
a. Account Receivables
b. Owner’s Equity
c. Cash
d. Accounting Equation
e. Freight- Out
f. Professional fees
g. Assets
h. Salary Expense
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1. coins and bills in the possession of the business
2. right of the owner in the business
3. delivery expense for merchandise sold
4. assets equal liabilities and owner’s equity
5. properties of the business, tangible or intangible
6. amount paid for service of employees
7. income derived in the practice of profession
8. collectible from clients for services rendered on account
2. CASE ANALYSIS
1. If Lakay Lugawan has total assets of ₱115,000 and total liabilities of ₱12,500, how much is Lakay
Lugawan total equity?
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2. Hanna Maganda has total assets of P25, 000 and equity of P32, 000, how much is her liabilities?
3. The total income of Basit Machine Shop is P110, 000 and total expenses of P30,000, how much is Basit
Machine Shop profit (or loss)?
assets of the business amounted to P100,000, which consists of P50,000 cash and ₱50,000 equipment.
The equipment has an unpaid balance of ₱20,000, the only liability of the business. How much is the
Solutions: