ACCOUNTING EQUATION

All businesses have three parts to their financial makeup:

• The things or property that the company owns.
We call these things ASSETS.
• The money that the company owes to other people.
We call these obligations LIABILTIES.
• The claim of the owner of the business to the Assets after the Liabilities are paid.
We call this claim OWNER’S EQUITY (or just EQUITY).
ACCOUNTING EQUATION

ASSETS = LIABILITIES + OWNER’S EQUITY

ASSETS are the RESOURCES OWNED BY A
BUSINESS .
Here are some types of assets that might be
owned by a business company:
LIABILITIES are the CREDITOR’S CLAIMS ON
ASSETS.
• Creditors are the people or companies to whom
a business owes something (like money).
• Here are some types of liabilities that a
company might owe:

EQUITY is the OWNER’S CLAIM ON ASSETS

In a business EQUITY is composed of four parts that either increase or decrease equity:

Sometimes we expand the Accounting Equation to show all the Equity components. This is called the
EXPANDED ACCOUNTING EQUATION.

This equation must ALWAYS BE IN BALANCE

Effects of Business Transactions in the Accounting Equation

Business Transactions
1. The owner invested cash to an internet business for P 200,000.
2. The business purchased internet equipment in cash for P 50,000.
3. The business purchased computer printers on account/ credit for P 10,000.
4. The business purchased supplies in cash for P 2,000
5. The business collected cash from the internet games and users for P 50,000
6. The business paid salaries to employees for P 10,000
7. The business paid communication expense for P 20,000
8. The business paid electricity bill worth P 2,000
9. The owner withdraws cash for P 5,000
10. The business partially paid the payable incurred in the purchase of computer printers for P 5,000
11. The owner invested additional cash to the business for P 100,000
12. At the end of the month, physical count of supplies shows consumption of supplies amount to P 1,500

Effects of Business Transactions in the Accounting Equation

Accounting Equation:

ASSETS = LIABILITIES + OWNER’S EQUITY (CAPITAL)

(left side of the equation) = (right side of the equation)

Transaction 1 Transaction 7
 Assets =  Assets =
 Liabilities =  Liabilities =
 Capital =  Capital =

Transaction 2 Transaction 8
 Assets =  Assets =
 Liabilities =  Liabilities =
 Capital =  Capital =

Transaction 3 Transaction 9
 Assets =  Assets =
 Liabilities =  Liabilities =
 Capital =  Capital =

Transaction 4 Transaction 10
 Assets =  Assets =
 Liabilities =  Liabilities =
 Capital =  Capital =

Transaction 5 Transaction 11
 Assets =  Assets =
 Liabilities =  Liabilities =
 Capital =  Capital =

Transaction 6 Transaction 12
 Assets =  Assets =
 Liabilities =  Liabilities =
 Capital =  Capital =

Business Transactions:
1. The owner invested P 97,000 in cash to begin the business. 6. Performed services for P 8,200 in cash.
2. Paid P 19,750 in cash for the purchase of equipment. 7. Performed services for P 6,300 on account.
3. Purchased additional equipment for P 14,400 on credit. 8. Paid P 4,000 for rent expense.
4. Paid P 11,800 in cash to creditors. 9. Received P 3,500 in cash from credit clients.
5. The owner made an additional investment of P 30,000 in 10. Paid P 6,460 in cash for office supplies.
cash. 11. The owner withdrew P 9,000 in cash for personal expenses.