Fundamentals of Accountancy, Business, and Management 1

Accounting Equation
Content Standards
The learners demonstrate an understanding of the accounting equation.

Performance Standards
The learners shall be able to solve problems by applying the accounting equation.

Learning Competencies
The learners shall be able to illustrate the accounting equation; perform operations involving
simple cases with the use of the accounting equation

Specific Learning Objectives

At the end of this lesson, the learners will be able to equate assets with liabilities and equity
solve problems using the accounting equation

INTRODUCTION

Accounting equation is Assets = Liabilities + Equity

 Assets are resources owned by the business.

 Liabilities are obligations by the business.
 Equity is the residual interest of the owner of the business.
Four elements that affect equity:
(1) Investment;
(2) Withdrawal;
(3) Revenue, and;
(4) Expenses.

MOTIVATION

For every transaction the accounting equation should always balance.

INSTRUCTION

Assets invested by the owner

July 1 - Paolo Reyes started a delivery service on July 1,2020. The following transactions
occurred during the month of July. He invested PHP800,000 cash and Cars amounting to
PHP200,000
 ASSETS = LIABILITIES + OWNER'S EQUITY
1-Jul Cash 800,000.00 Reyes, Capital 1,000,000.00
Cars 200,000.00

Borrowings from the bank

July 2 – Reyes borrowed PHP100,000 cash from PNB for use in his business.
ASSETS = LIABILITIES + OWNER'S EQUITY
2-Jul Cash 100,000.00 Loans Payable 100,000.00

BALANCES ASSETS = LIABILITIES + OWNER'S EQUITY

Cash 900,000.00 Loans Payable 100,000.00 Reyes, Capital 1,000,000.00
Cars 200,000.00

Asset purchased for cash

July 7 – Bought tables and chairs from Orocan and paid PHP45,000 cash
ASSETS = LIABILITIES + OWNER'S EQUITY
7-Jul Furnitures 45,000.00
Cash (45,000.00)

BALANCES ASSETS = LIABILITIES + OWNER'S EQUITY

Cash 855,000.00 Loans Payable 100,000.00 Reyes, Capital 1,000,000.00
Cars 200,000.00
Furnitures 45,000.00

Assets purchased on account

July 15 – Various equipment were purchased on account from Fortune for PHP55,000
15-Jul ASSETS = LIABILITIES + OWNER'S EQUITY
Equipment 55,000.00 Accounts Payable 55,000.00

BALANCES ASSETS = LIABILITIES + OWNER'S EQUITY

Cash 855,000.00 Loans Payable 100,000.00 Reyes, Capital 1,000,000.00
Cars 200,000.00 Accounts Payable 55,000.00
Furnitures 45,000.00
Equipment 55,000.00

Cash withdrawal by the owner

July 18 – Reyes made a cash withdrawal of PHP5,000 for personal use
18-Jul ASSETS = LIABILITIES + OWNER'S EQUITY
Cash (5,000.00) Reyes, Drawing (5,000.00)

BALANCES ASSETS = LIABILITIES + OWNER'S EQUITY

Cash 850,000.00 Loans Payable 100,000.00 Reyes, Capital 1,000,000.00
Cars 200,000.00 Accounts Payable 55,000.00 Reyes, Drawing (5,000.00)
Furnitures 45,000.00
Equipment 55,000.00
Payment of liability
July 20 – The account due to Fortune was paid in cash
20-Jul ASSETS = LIABILITIES + OWNER'S EQUITY
Cash (55,000.00) Accounts Payable (55,000.00)

BALANCES ASSETS = LIABILITIES + OWNER'S EQUITY

Cash 795,000.00 Loans Payable 100,000.00 Reyes, Capital 1,000,000.00
Cars 200,000.00 Reyes, Drawing (5,000.00)
Furnitures 45,000.00
Equipment 55,000.00

The following table summarizes the effects of these transactions on the accounting equation
Date ASSETS LIABILITIES OWNERS' EQUITY
Loans Accounts Reyes, Reyes,
July Cash Cars Furnitures Equipment
Payable Payable Drawings Capital
1 800,000 200,000 1,000,000
2 100,000 100,000
Balances 900,000 200,000 - - 100,000 - - 1,000,000
7 (45,000) 45,000
Balances 855,000 200,000 45,000 - 100,000 - - 1,000,000
15 55,000 55,000
Balances 855,000 200,000 45,000 55,000 100,000 55,000 - 1,000,000
18 (5,000) (5,000)
Balances 850,000 200,000 45,000 55,000 100,000 55,000 (5,000) 1,000,000
20 (55,000) (55,000)
Balances 795,000 200,000 45,000 55,000 100,000 - (5,000) 1,000,000
1,095,000 1,095,000

Determining profit through operation

• Accrual basis of accounting vs Cash basis of accounting – accrual basis recognizes
revenue when earned and recognizes expenses when incurred
• Under the expense recognition principle, expenses can be recognized either as: (1)
matching; (2) systematic allocation, or; (3) direct association.
• Profit measures the performance of the company. If the revenue exceeds expenses,
then it is a net profit; otherwise, it is a net loss.

Received cash for revenue earned

July 21 – A customer hired the services of Reyes. Cash of PHP15,000 was received from the
customers.
21-Jul ASSETS = LIABILITIES + OWNER'S EQUITY
Cash 15,000.00 Service Revenue 15,000.00
Paid cash for expenses incurred
July 22 – Cash was paid for the following: gas and oil, PHP500 and car repairs, PHP1,000.
22-Jul ASSETS = LIABILITIES + OWNER'S EQUITY
Cash (1,500.00) Gas and Oil (500.00)
Repair Expense (1,000.00)

Revenue rendered on account

July 24 – Another customer hired the services of Reyes and promised to pay PHP16,000 on July
31.
24-Jul ASSETS = LIABILITIES + OWNER'S EQUITY
Accounts Receivables 16,000.00 Service Revenue 16,000.00

Paid for expenses incurred

July 25 – Paid PHP500 for telephone bill.
25-Jul ASSETS = LIABILITIES + OWNER'S EQUITY
Cash (500.00) Telephone Expense (500.00)

Revenue earned with a downpayment, balance on account

July 27 – Another customer hired the services of Reyes. A bill was issued to them for
PHP20,000, 50% of which was collected
27-Jul ASSETS = LIABILITIES + OWNER'S EQUITY
Cash 10,000.00 Service Revenue 20,000.00
Accounts Receivables 10,000.00

Customer’s account collected in cash

July 30 – The customer on July 24 paid 50% of his account in cash.
30-Jul ASSETS = LIABILITIES + OWNER'S EQUITY
Cash 8,000.00
Accounts Receivables (8,000.00)

Paid cash for expenses incurred

July 31 – Paid PHP10,000 for rental of office space, and salaries of PHP9,000
31-Jul ASSETS = LIABILITIES + OWNER'S EQUITY
Cash (19,000.00) Rent Expense 10,000.00
Salaries Expense (9,000.00)

PRACTICE
Concept check. Use the following question set for practice.

For each transaction, tell whether the assets, liabilities and equity will increase (I), decrease (D)
or is not affected (NE).

Asset Liabilities Equity

1 The owner invests personal cash in the business
2 The owner withdraws business assets for personal
 use
3 The company receives cash from a bank loan
4 The company repays the bank that has lent money
5 The company purchases equipment with its cash
6 The owner contributes her personal truck to the
business
7 The company purchases supplies on credit
8 The company purchases land by paying half in cash
and signing a note
9 The owner withdraws cash for personal use
10 The company repays the suppliers

ENRICHMENT

The activity below is in reverse. Describe the given transaction.

Date ASSETS LIABILITIES OWNER'S EQUITY

Cash Supplies Equipment
Balances 60,000 7,500 300,000 75,000 292,500
1 150,000 150,000
2 (20,000) 20,000
3 (112,500) (112,500)
4 5,000 5,000
5 (15,000) (15,000)
6 (53,000) (53,000)
7 (8,000) (8,000)

EVALUATION
Give the following questions as their assignment

Aug. 1 Garcia invested PHP48,000 cash in the business.

Aug. 1 Rented office space and paid PHP800 cash for the August rent.
Aug. 3 Purchased exploration equipment for PHP22,000 by paying PHP12,000 cash and
agreeing to pay the balance in 3 months.
Aug. 5 Purchased office supplies by paying PHP1,500 cash.
Aug. 6 Completed exploration work and immediately collected PHP420 cash for the
work.
Aug. 8 Purchased PHP1,350 of office equipment on credit.
Aug. 15 Completed exploration work on credit in the amount of PHP8,000.
Aug. 18 Purchased PHP700 of office supplies on credit.
Aug. 20 Paid cash for the office equipment purchased on August 8.
Aug. 24 Billed a client PHP2,400 for work completed; the balance is due in 30 days.
Aug. 28 Received PHP5,000 cash for the work completed on August 15.
Aug. 30 Paid the assistant’s salary of PHP1,100 cash for this month.
Aug. 30 Paid PHP340 cash for this month’s utility bill.
Aug. 30 Garcia withdrew PHP1,050 cash from the business for personal use.

Required
1. Arrange the following asset, liability, and equity titles in a table: Cash; Accounts
Receivable; Office Supplies; Office Equipment; Exploration Equipment; Accounts
Payable; Jerome Garcia, Capital; Jerome Garcia, Withdrawals; Revenues; and Expenses.
2. Use additions and subtractions to show the effects of each transaction on the accounts
in the accounting equation. Show new balances after each transaction.