The Accounting Equation

THE ACCOUNTING
EQUATION
Module 3
What is an Accounting
Equation?
 Accounting Equation represents the
relationship between your business’s assets,
liabilities, and equity.
 By using the accounting equation, you can see
if your assets are financed by debt or business
funds.
 The accounting equation is used in
double-entry accounting.
DOUBLE-ENTRY BOOKKEEPING
 means that for every business transaction,
amounts must be recorded in a minimum of
two accounts, amounts entered as debits
must be equal to the amounts entered as
credits.
Balance Sheet
 The balance sheet is a financial
statement that tracks your company’s
progress.
The balance sheet is broken down into three major sections and their
various underlying items: Assets, Liabilities, and Shareholder’s Equity.
3 Parts of the Balance Sheet
 Assets - are items of value that your business owns. For example, your
business bank account, company vehicles, and equipment are assets.
 Liabilities - are debts that you owe to others. For example, your payables
are liabilities.
 Owner’s equity - shows your ownership in the business. If you are a sole
proprietor, you hold all the ownership. If there is more than one owner, you
split the equity. Calculate equity by subtracting your assets from liabilities.
ASSETS
CASH – money that we use comprising of the bills and coins we use in our everyday lives in
order to buy goods that we want and avail the services that we need.
ACCOUNTS RECEIVABLES – this represents amounts that are collectible from the
customers. They arise when a business sells its goods or services on account or on credit.
INVENTORIES – goods available for sale and raw materials used to produce goods
available for sale.
EQUIPMENT – all such instruments which are used for producing any products or machine
or service.
LAND AND BUILDING – is a non-current asset account which shows the cost building, it
will be depreciated over their useful life.
INTANGIBLE ASSETS – assets that are not physical in nature (ex. Computer software,
goodwill)
LIABILITIES
 ACCOUNTS PAYABLE - is a liability due to a
particular creditor when it order goods or services
without paying in cash up front, which means that
you bought goods on credit.
 UNEARNED REVENUE - sometimes referred to
as deferred revenue, is payment received by a
company from a customer for products or services
that will be delivered at some point in the future.
EQUITY
 CAPITAL -amount or asset which is invested in
business by businessman or owner of business.
 OWNER’S DRAWING – an account used to record
the current year's withdrawals of business assets by
the sole proprietor for personal use.
 RETAINED EARNINGS - the amount of
net income left over for the business after it has paid
out dividends to its shareholders.
Basic Accounting Equation Formula
Assets = Liabilities + Equity

It shows that the total assets of a business are equal to the
total liabilities and owner’s equity because you must purchase
things with either debt or capital.
The accounting equation can also be rearranged into
the following form:
 You can write the accounting equation with the
liabilities by itself:
Liabilities = Assets – Equity
 Or, you can write the accounting equation with
equity by itself:
Equity = Assets – Liabilities
ASSETS = LIABILITIES + EQUTIY
Cash Accounts Payable Owner’s Capital

Accounts Unearned
Receivables Revenues
Inventories
Equipment
Land &
Building
Intangible
Assets
1. Initial Investment.
Manang Rosie decided to open up a barbeque store in her
neighborhood. In order to do so, she invested P25,000 as initial capital.
ASSETS = LIABLILTIES + EQUITY
CASH OWNER’S EQUITY

(1) +P25,000 (1) +P25,000
P25,000.00 P25,000.00
2.Purchased of Equipment.
To actually create her famous barbeque, she bought a necessary equipment
such as grills and utensils for P20,000.
CASH (1) +P25,000 EQUITY (1) +P25,000

CASH (2) -P20,000
5,000
EQUIPMENT (2) +P20,000
P25,000 P25,000
3.Purchased of Inventories through Credit.
Manang Rosie purchased inventories such as meats and other ingredients through credit
amounting P10,000.
CASH (1) +P25,000 A/P (3) +P10,000 EQUITY (1) +P25,000

CASH (2) -P20,000
5,000
INVENTORIES (3) +P10,000
P35,000 P10,000 P25,000

EXPANDED ACCOUNTING
EQUATION
 provides an enhanced level of detail regarding
the shareholders’ equity portion of the standard
accounting equation.
EXPANDED ACCOUNTING
EQUATION FORMULA
ASSETS = LIABILITIES + EQUITY + REVENUE - EXPENSE

4.Payment of Expenses.
To actually set up business, Manang Rosie obtain a Municipal business permit and she
paid the amount of P1,000.
CASH (1) +P25,000 A/P (3) +P10,000 EQUITY (1) +P25,000

CASH (2) -P20,000
5,000
CASH (4) -P 1,000 EXPENSES (4) –P1,000
4,000 P24,000
P34,000 P10,000 P24,000

5.Sales of Barbeque.
During the first of her new business venture, she was able to sell 1000pcs bbq with a
price of P20,000. Half of which was paid cash, the other half to be paid after 5 days.

CASH (1) +P25,000
CASH (2) -P20,000
5,000 A/P (3) +P10,000 EQUITY (1) +P25,000
CASH (4) -P 1,000
4,000
CASH (5) +10,000 EXPENSES (4) –P1,000
P24,000
P14,000
REVENUE (5) +20,000
A/R (5) +P10,000
P54,000 P10,000 P44,000

ACTIVITY:
Listed below are ten (10) transactions of Aling Puring Company during its first month operation. Indicate the effects of the given
transactions on each of the financial statement elements in the table on the next slide. The answer for the first transaction is given as an
example.
1. Owner invested cash in the business amounting to P300,000.

2. Purchased equipment for cash amounting to P50,000
3. Purchased inventories through credit amounting P35,000.
4. Purchased furniture amounting to P30,000. Made partial payment with cash P10,000 and incurred an
accounts payable for the balance P20,000.
5. Paid cash to the local government for business permit P9,000
6. Made sales of P17,000 – P12,000 cash sales, P5,000 credit sales
7. The cost of the sale made in (6) amounted to P8,500
8. Paid the accounts payable in (4)
9. Collected P2,500 out of the P5,000 credit sales in (6)
10. Paid employee P12,000
ASSETS = LIABILITIES + EQUITY + REVENUE - EXPENSE
P300,000 P300,000
Why the accounting equation is important?
 The accounting equation can give you a clear picture of your business’s
financial situation.
 The accounting equation helps you understand the relationship between your
financial statements.
 The purpose of the balance sheet is to show the financial position of the
business on any given day. The balance sheet can tell you how much money
the business has in the bank and how likely it is that the business will be able
to meet all of its financial obligations. It can also tell you how much profit (or
loss) the business has retained since it started.
 By using the accounting equation, you can see if you can fund the purchase of
an asset with your business’s existing assets. And, the equation will reveal if
you should pay off debts with assets (like cash) or by taking on more liabilities
Title Lorem Ipsum
01 02 03
LOREM IPSUM NUNC VIVERRA PELLENTESQUE
DOLOR SIT AMET, IMPERDIET ENIM. HABITANT MORBI
CONSECTETUER FUSCE EST. TRISTIQUE
ADIPISCING ELIT. VIVAMUS A TELLUS. SENECTUS ET
MAECENAS NETUS ET
MALESUADA
FAMES.

The Accounting Equation

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The Accounting Equation

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THE ACCOUNTING

Assets = Liabilities + Equity

Cash Accounts Payable Owner’s Capital

CASH OWNER’S EQUITY

ASSETS = LIABLILTIES + EQUITY

CASH (1) +P25,000 EQUITY (1) +P25,000

EQUIPMENT (2) +P20,000

ASSETS = LIABLILTIES + EQUITY

CASH (1) +P25,000 A/P (3) +P10,000 EQUITY (1) +P25,000

EQUIPMENT (2) +P20,000

INVENTORIES (3) +P10,000

P35,000 P10,000 P25,000

ASSETS = LIABILITIES + EQUITY + REVENUE - EXPENSE

ASSETS = LIABLILTIES + EQUITY

CASH (1) +P25,000 A/P (3) +P10,000 EQUITY (1) +P25,000

EQUIPMENT (2) +P20,000

INVENTORIES (3) +P10,000

P34,000 P10,000 P24,000

ASSETS = LIABLILTIES + EQUITY

INVENTORIES (3) +P10,000

A/R (5) +P10,000

P54,000 P10,000 P44,000

1. Owner invested cash in the business amounting to P300,000.

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