11

2 Fundamentals of
Accountancy,
Business and
Management 1
Quarter 3 – Module 2:

Accounting Concepts and

Principles and the Accounting
Equation

SELF-LEARNING MODULE

DIVISION OF GENERAL SANTOS CITY

Fundamentals of Accountancy, Business and Management for Grade 11
Self-Learning Module (SLM)
Quarter 3 – Module 2: Accounting Concepts and Principles and Accounting Equation
First Edition, 2021

Republic Act 8293, section 176 states that: No copyright shall subsist in any work
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ownership over them.

Development Team of the Module

Writers: Ma. Annabelle A. Linobo
Editors: Milagros L. Gazo, Renato F. Docusin, Hilda Emma D. Macaway
Reviewers: Luzviminda R. Loreno - Division Senior High School Coordinator
Illustrator: Ma. Annabelle A. Linobo
Layout Artist: Donabella P. Pagalan
Cover Art Designer: Reggie D. Galindez
Management Team: Romelito G. Flores, CESO V – Schools Division Superintendent
Carlos G. Susarno, CESO VI – OIC Asst. Schools Division Superintendent
Juliet F. Lastimosa, CID Chief
Sally A. Palomo, EPS - LRMS
Gregorio O. Ruales, EPS – ADM Coordinator
Luzviminda R. Loreno – Division Senior High School Coordinator

Printed in the Philippines by Department of Education – General Santos City

Office Address: Tiongson St., Lagao, General Santos City

Telefax: (083) 552-8909
E-mail Address: depedgensan@deped.gov.ph
 11
Fundamentals of
Accountancy, Business
and Management 1
Quarter 3 – Module 2:
Accounting Concepts and
Principles and the Accounting
Equation

SELF-LEARNING MODULE

DIVISION OF GENERAL SANTOS CITY

Introductory Message
For the facilitator:

Welcome to the Fundamentals of Accountancy Business and Management 1 for

Grade 12 Self-Learning Module (SLM) : Accounting Concepts and Principles and
Accounting Equation.

This module was collaboratively designed, developed and reviewed by educators

both from public and private institutions to assist you, the teacher or facilitator in
helping the learners meet the standards set by the K to 12 Curriculum while
overcoming their personal, social, and economic constraints in schooling.

This learning resource hopes to engage the learners into guided and independent
learning activities at their own pace and time. Furthermore, this also aims to help
learners acquire the needed 21st century skills while taking into consideration
their needs and circumstances.

In addition to the material in the main text, you will also see this box in the body of
the module:

Notes to the Teacher

This contains helpful tips or strategies
that will help you in guiding the learners.

As a facilitator you are expected to orient the learners on how to use this module.
You also need to keep track of the learners' progress while allowing them to
manage their own learning. Furthermore, you are expected to encourage and assist
the learners as they do the tasks included in the module.

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For the learner:

Welcome to the Fundamentals of Accountancy Business and Management 1 for

Grade 11 Self-Learning Module (SLM) Accounting Concepts and Principles and
The Accounting Equation.

The hand is one of the most symbolized parts of the human body. It is often used to
depict skill, action and purpose. Through our hands we may learn, create and
accomplish. Hence, the hand in this learning resource signifies that you as a
learner is capable and empowered to successfully achieve the relevant
competencies and skills at your own pace and time. Your academic success lies in
your own hands!

This module was designed to provide you with fun and meaningful opportunities
for guided and independent learning at your own pace and time. You will be
enabled to process the contents of the learning resource while being an active
learner.

This module has the following parts and corresponding icons:

What I Need to Know This will give you an idea of the skills or
competencies you are expected to learn in
the module.

What I Know This part includes an activity that aims to

check what you already know about the
lesson to take. If you get all the answers
correct (100%), you may decide to skip this
module.

What’s In This is a brief drill or review to help you link

the current lesson with the previous one.

What’s New In this portion, the new lesson will be

introduced to you in various ways such as a
story, a song, a poem, a problem opener, an
activity or a situation.

What is It This section provides a brief discussion of

the lesson. This aims to help you discover
and understand new concepts and skills.

What’s More This comprises activities for independent

practice to solidify your understanding and
skills of the topic. You may check the
answers to the exercises using the Answer
Key at the end of the module.

What I Have Learned This includes questions or blank

sentence/paragraph to be filled in to process
what you learned from the lesson.

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 What I Can Do This section provides an activity which will
help you transfer your new knowledge or
skill into real life situations or concerns.

Assessment This is a task which aims to evaluate your

level of mastery in achieving the learning
competency.

Additional Activities In this portion, another activity will be given

to you to enrich your knowledge or skill of
the lesson learned. This also tends retention
of learned concepts.

Answer Key This contains answers to all activities in the

module.

At the end of this module you will also find:

References This is a list of all sources used in

developing this module.

The following are some reminders in using this module:

1. Use the module with care. Do not put unnecessary mark/s on any part of
the module. Use a separate sheet of paper in answering the exercises.
2. Don’t forget to answer What I Know before moving on to the other activities
included in the module.
3. Read the instruction carefully before doing each task.
4. Observe honesty and integrity in doing the tasks and checking your answers.
5. Finish the task at hand before proceeding to the next.
6. Return this module to your teacher/facilitator once you are through with it.
If you encounter any difficulty in answering the tasks in this module, do not
hesitate to consult your teacher or facilitator. Always bear in mind that you are
not alone.

We hope that through this material, you will experience meaningful learning
and gain deep understanding of the relevant competencies. You can do it!

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 What I Need to Know

Not a single person in the world lived without following some rules. We are
subjected to rules all our lives. When you were young, your parents probably told
you not to sleep late at night, not to play too much video games, or not to go
outside when it is already dark. At school, you were introduced to new set of rules.
No sleeping during class time, no loitering around, do all your homework, and
come to school on time are just some of these rules. After you have finished school,
the workplace will once again impose another set of rules. Rules impede our
freedom, but it is for the common good. Can you imagine our society without a law
that governs us? Somebody could steal your phone or hurt you physically, and it is
perfectly legal. Without rules, we would live in chaos.
Just like all other fields of study, accounting also has concepts, principles,
and assumptions. Collectively, these concepts, principles, and assumptions serve
as a guide, and simply, the study of accounting. In this module, we will tackle all
the general accounting concepts and principles.
This Module 2 is all about Accounting concepts and principles and the
accounting equation.
Relax. Let’s enjoy the fun! I tell you, you will learn more in this specialized
subject.
This module is divided into two lessons:
Lesson 1: Accounting Concepts and Principles
Lesson 2: Accounting Equation

Learning Objectives
At the end of this module, you will be able to:
a. explain the varied accounting concepts and principles
b. identify the different accounting principles applied in various cases
c. illustrate the accounting equation
d. perform operations involving simple cases with the use of accounting
equation.

GENERAL INSTRUCTION: Write all your answers on the answer sheet or in a

separate paper/notebook as per advised by the subject teacher.

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 What I Know

Let us see what you know about the new topic

Hi! Are you ready now to listen to the new topic? Well, seatback and relax, as I
solicit some ideas from you about accounting concepts and principles and
accounting equation. Who knows then you can relate to the topic by your
experiences at home, or maybe in your studies.

Before we start our lesson, lets’ check yourselves how much you already know
about our topic.

Instruction: Read the sentences/statements carefully. Choose the letter of the

correct answer.

1. The creative chief executive of a corporation who is personally responsible for

numerous inventions and innovations is not reported as an asset on the
corporation's balance sheet. The accounting principle/guideline that prevents the
corporation for reporting this person as an asset is
a. conservatism c. going concerns
b. cost d. disclosure

2. An asset with a cost of $120,000 is depreciated over its useful life of 10 years
rather than expensing the entire amount when it is purchased. This complies with
which principle/guideline?
a. cost c. matching
b. full disclosure d. monetary

3. A retailer wishes to report its merchandise inventory on its balance sheet at its
retail value. This would violate which accounting principle/guideline?
a. cost c. monetary unit
b. full disclosure d. going concern

4. This concept require objective business documents to support every business

transaction.
a. entity c. matching
b. verifiability d. disclosure

5. It divides the life of a business into regular intervals (usually 1 year) at the end of
which financial statements are prepared.
a. time period c. entity
b. consistency d. accrual

6. Under this concept, money is used as the unit of measure in preparing the
various reports of the company.
a. conservatism c. monetary unit
b. materiality d. revenue realization

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7. Which principle/guideline directs a company to show all the expenses related to
its revenues of a specified period even if the expenses were not paid in that period?
a. cost c. monetary unit
b. matching d. verifiability

8. When the accountant has to choose between two acceptable alternatives, the
accountant should select the alternative that will report less profit, less asset
amount, or a greater liability amount. This is based upon which principle/guideline?
a. conservatism c. materiality
b. cost d. materiality

9. A company sold merchandise of Php 8,000 to a customer in December. The

company's sales terms require the customer to pay the company in 30 days. The
company's income statement reported the sale in December. This is proper under
which accounting principle/guideline?
a. full disclosure c. revenue recognition
b. monetary unit d. matching

10. Accrual accounting is based on this principle/guideline.

a. cost c. matching
b. full disclosure d. revenue realization
11. The personal assets of the owner of a company will not appear on the
company's balance sheet because of which principle/guideline?
a. cost c. monetary unit
b. entity d. accrual

12. Which principle/guideline requires a company's balance sheet to report its land
at the amount the company paid to acquire the land, even if the land could be sold
today at a significantly higher amount?
a. cost c. materiality
b. economic entity d. monetary unit

13. Which principle/guideline requires the company's financial statements to have

footnotes containing information that is important to users of the financial
statements?
a. conservatism c. full disclosure
b. economic entity d. verifiability

14. Which principle/guideline justifies a company violating an accounting principle

because the amounts are immaterial?
a. conservatism c. materiality
b. full disclosure d. monetary

15. Which principle/guideline is associated with the assumption that the company
will continue on long enough to carry out its objectives and commitments?
a. economic entity c. time period
b. going concern d. consistency

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Lesson
Accounting Concepts and
1 Principles
Good day students! In our previous lessons we studied about the definition, nature
and history of accounting. You have probably determine the internal and external
users of financial records/data.

Today we will discuss the varied accounting concepts and principles as well as the
accounting equation.

What’s In

Companies have thousands of stakeholders who have invested millions, and they
need a uniform, standardized system of accounting by which they can be compared
on the basis of their performance and value. Therefore, accounting principles based
on certain concepts, convention, and tradition have been evolved by accounting
authorities and regulators and are followed internationally. These principles,
which serve as the rules for accounting for financial transactions and preparing
financial statements, are known as the “Generally Accepted Accounting Principles,”
or GAAP.

Let’s review some important points in your previous topic.

1. What is accounting?

__________________________________________________________________________________
__________________________________________________________________________________

2. Can you describe the nature of accounting?

__________________________________________________________________________________
__________________________________________________________________________________

3. Who is the father of Accounting?

__________________________________________________________________________________
__________________________________________________________________________________
4. Why do we study accounting?

__________________________________________________________________________________
__________________________________________________________________________________

5. Who were the internal and external users of accounting?

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__________________________________________________________________________________
__________________________________________________________________________________

Notes to the Teacher

Teacher facilitates an activity that enables learners to use
previously taught lesson.

What’s New

Let’s warm up!

Let’s begin our new lesson with this activity.

Activity 1.

Instruction: Given the following data, solve for the missing values, and write your
answers on your paper

ASSETS LIABILITIES OWNERS EQUITY

500,000 (c)(? 320,000
(a) ? 1,200,000 600,000
1,300,000 600,000 (e)?
420,000 (d)? 170,000
330,000 100,000 (f)?
(b) ? 150, 000 200, 000

What is It

Let us answer these questions as we discuss our topic.

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 1. What can you say about our activity?

__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

2. Did it give you an idea how to solve/compute Assets, Liabilities and Capital?

__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

3. What are your learnings with regards to the activity done?

__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

Accounting Concepts and Principles are a set of broad conventions that have
been devised to provide a basic framework for financial reporting. As financial
reporting involves significant professional judgments by accountants, these
concepts and principles ensure that the users of financial information are not
mislead by the adoption of accounting policies and practices that go against the
spirit of the accountancy profession. Accountants must therefore actively consider
whether the accounting treatments adopted are consistent with the accounting
concepts and principles.

Basic Accounting Principles

A number of basic accounting principles have been developed through common

usage. They form the basis upon which the complete suite of accounting
standards have been built. The best-known of these principles are as follows:

 Accrual principle. This is the concept that accounting transactions should be

recorded in the accounting periods when they actually occur, rather than in the
periods when there are cash flows associated with them. This is the foundation
of the accrual basis of accounting. It is important for the construction of
financial statements that show what actually happened in an accounting period,
rather than being artificially delayed or accelerated by the associated cash flows.
For example, if you ignored the accrual principle, you would record an expense
only when you paid for it, which might incorporate a lengthy delay caused by
the payment terms for the associated supplier invoice.
 Conservatism principle. This is the concept that you should record expenses
and liabilities as soon as possible, but to record revenues and assets only when
you are sure that they will occur. This introduces a conservative slant to the
financial statements that may yield lower reported profits, since revenue and
asset recognition may be delayed for some time. Conversely, this principle tends
to encourage the recordation of losses earlier, rather than later. This concept
can be taken too far, where a business persistently misstates its results to be
worse than is realistically the case.
 Consistency principle. This is the concept that, once you adopt an accounting
principle or method, you should continue to use it until a demonstrably better

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 principle or method comes along. Not following the consistency principle means
that a business could continually jump between different accounting
treatments of its transactions that makes its long-term financial results
extremely difficult to discern.
 Cost principle. This is the concept that a business should only record its
assets, liabilities, and equity investments at their original purchase costs. This
principle is becoming less valid, as a host of accounting standards are heading
in the direction of adjusting assets and liabilities to their fair values.
 Economic/Separate entity principle. This is the concept that the transactions
of a business should be kept separate from those of its owners and other
businesses. This prevents intermingling of assets and liabilities among multiple
entities, which can cause considerable difficulties when the financial
statements of a fledgling business are first audited.
 Full disclosure principle. This is the concept that you should include in or
alongside the financial statements of a business all of the information that may
impact a reader's understanding of those statements. The accounting standards
have greatly amplified upon this concept in specifying an enormous number of
informational disclosures.
 Going concern principle. This is the concept that a business will remain in
operation for the foreseeable future. This means that you would be justified in
deferring the recognition of some expenses, such as depreciation, until later
periods. Otherwise, you would have to recognize all expenses at once and not
defer any of them.
 Matching principle. This is the concept that, when you record revenue, you
should record all related expenses at the same time. Thus, you charge inventory
to the cost of goods sold at the same time that you record revenue from the sale
of those inventory items. This is a cornerstone of the accrual basis of
accounting. The cash basis of accounting does not use the matching the
principle.
 Materiality principle. This is the concept that you should record a transaction
in the accounting records if not doing so might have altered the decision
making process of someone reading the company's financial statements. This is
quite a vague concept that is difficult to quantify, which has led some of the
more picayune controllers to record even the smallest transactions.
 Monetary unit principle. This is the concept that a business should only
record transactions that can be stated in terms of a unit of currency. Thus, it is
easy enough to record the purchase of a fixed asset, since it was bought for a
specific price, whereas the value of the quality control system of a business is
not recorded. This concept keeps a business from engaging in an excessive level
of estimation in deriving the value of its assets and liabilities.
 Reliability principle. This is the concept that only those transactions that can
be proven should be recorded. For example, a supplier invoice is solid evidence
that an expense has been recorded. This concept is of prime interest to auditors,
who are constantly in search of the evidence supporting transactions.
 Revenue recognition principle. This is the concept that you should only
recognize revenue when the business has substantially completed the earnings
process. So many people have skirted around the fringes of this concept to
commit reporting fraud that a variety of standard-setting bodies have developed
a massive amount of information about what constitutes proper revenue
recognition.

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 Time period principle. This is the concept that a business should report the
results of its operations over a standard period of time. This may qualify as the
most glaringly obvious of all accounting principles, but is intended to create a
standard set of comparable periods, which is useful for trend analysis. These
principles are incorporated into a number of accounting frameworks, from
which accounting standards govern the treatment and reporting of business
transactions.

What Is GAAP?

GAAP is a set of rules used for helping publicly-traded companies create their
financial statements. These rules form the groundwork on which more
comprehensive, complex, and legalistic accounting rules are based

Financial accounting information is based on historical data. To facilitate

comparisons, the financial information must follow the generally accepted
accounting principles.

While the overall GAAP is specified by the Financial Accounting Standards Board,
the Governmental Accounting Standards Board (GASB) specifies GAAP for state
and local government. Compliance with GAAP as well as SEC is required by
publicly traded companies.

What Are the Principles of Accounting?

The best way to understand the GAAP requirements is to look at the ten principles
of accounting.

1. ECONOMIC ENTITY PRINCIPLE

The business is considered a separate entity, so the activities of a business must be

kept separate from the financial activities of its business owners.

2. MONETARY UNIT PRINCIPLE

The monetary unit assumption means that only transactions in U.S. dollar
amounts can be included in accounting records. It’s important to note that
accountants ignore the effects of inflation on the recorded dollar amounts.

3. TIME PERIOD PRINCIPLE

The business activities may be reported in short, distinct time intervals which may
be weeks, months, quarters, a calendar year or fiscal year. The time interval has to
be identified in the headings of the financial statements such as the income
statement, statement of cash flow and stockholders’ equity statement.

4. COST PRINCIPLE

The cost principle mentions the historical cost of an item. This refers to cash or
cash equivalent that was paid to purchase an item in the past. This asset amount
is adjusted for inflation. The historical cost is reported on the financial statements.

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5. FULL DISCLOSURE PRINCIPLE

All information that is relative to the business and is important to a lender or

investor must be disclosed in the content of the financial statements or in the notes
to the statements. This is the reason that numerous footnotes are attached to
financial statements

6. GOING CONCERN PRINCIPLE

This accounting principle refers to the intent of a business to carry on its

operations and commitments into the foreseeable future and not to liquidate the
business.

7. MATCHING PRINCIPLE

The matching principle requires that businesses use the accrual basis of
accounting and match business income to business expenses in a given time period.

For example, the commissions for sales should be recorded in the same accounting
period that sales income was made (and not when they were paid).

8. REVENUE RECOGNITION PRINCIPLE

Under the accrual basis of accounting, the revenues must be reported on the
income statement in the period in which it is earned. This means that as soon as a
product is sold, or the service has been performed, the revenues are recognized.
This is regardless of whether the money is received or not.

9. MATERIALITY PRINCIPLE

The materiality principle refers to the misstatement in accounting records when the
amount is insignificant or immaterial. Because of the materiality principle,
financial statements usually show amounts rounded to the nearest dollar.

10. CONSERVATISM PRINCIPLE

If accountants are unsure about how to report an item, conservatism principle calls
for potential expenses and liabilities to be recognized immediately. It directs the
accountant to anticipate the losses and choose the alternative that will result in
less net income and/or less asset amount.

For example, potential lawsuits may be regarded as losses and are reported but
potential gains from other sources are not.

What Are the 10 Principles of GAAP?

There are ten principles that can help you understand the mission of the GAAP
standards and rules.

1. PRINCIPLE OF REGULARITY

The principle states that the accountant has complied to the GAAP rules and
regulations.

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2. PRINCIPLE OF CONSISTENCY

The accountants should enter all items in exactly the same way that it has been
fixed. By applying similar standards in the reporting process, accountants can
avoid errors or discrepancies.

If the standards are changed or updates, the accountants are expected to fully
disclose and explain the reasons behind the changes.

3. PRINCIPLE OF SINCERITY

As per this principle, the accountant should provide the correct depiction of the
financial situation of a business.

4. PRINCIPLE OF PERMANENCE OF METHOD

The focus of this principle is that there should be a consistency in the procedures
used in financial reporting.

5. PRINCIPLE OF NON-COMPENSATION

The full details of the financial information should be disclosed including negatives
and positives. This should be done without the expectation of debt compensation
by an asset or revenue by an expense.

6. PRINCIPLE OF PRUDENCE

The financial data representation should be done “as it is” and not based on any
speculation.

7. PRINCIPLE OF CONTINUITY

The principle assumes that the business will continue its operations in the future.

8. PRINCIPLE OF PERIODICITY

The accounting entries are distributed across the suitable time periods.

9. PRINCIPLE OF FULL DISCLOSURE

While creating the financial reports, the accountants must strive for full disclosure.

10. PRINCIPLE OF UTMOST GOOD FAITH

This principle states presupposes that the parties remain honest in transactions.

While the GAAP principles are used by large companies while reporting their
financial information, if you believe your small business may eventually be subject
to GAAP, you may want to adopt the standard early on.

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 What’s More

Congratulations! You have just learned a lot about principles of accounting. This
learning will be enhanced by our next activity. OK…here we go!

Activity 2: Let’s View It!

Slide share presentation about Accounting Concepts and Principles with

Examples.

Instruction: Watch the slide share seriously and answer the following guide
questions.

Link: https://www.slideshare.net/paneliyakumar/accounting-concepts-and-
principles-with-examples

Guide Question:

1. What is the slide share all about?

__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

2. What are the importance of accounting concepts and principles in business?

__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

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Lesson

2 Accounting Equation

What’s New

We always hear about the Statement of Assets, Liabilities, and Net Worth (SALN)
of our public officials. Almost every year, we always hear how Senator A increased
his or her net worth by a certain amount, or how Senator B becomes the richest
Senator in the Philippines, while Senator C is the poorest. Generally, through this
public document, we can see and monitor the changes in the net worth of each of
these officials of our country. Understanding a SALN is quite straightforward as it
is just an information sheet enumerating the properties and debts of a public
official. The document can be generally divided into three parts: (1) the official's
personal information, (2) the listing of his or her assets and liabilities, and (3) the
official's sworn statement. (See sample of SALN). However, have you ever
wondered how the net worth of each officials computed? Basically, we can
determine anyone's net worth by just deducting the individual's liabilities (what
the individual owes) to his or her assets (what he or she owns). The result will
equate to the net worth of the individual which, in a sense, measures his or
her value in money.

This computation of net worth of an individual is derived from one of the most
fundamental concepts in the study of accounting-the accounting equation. This
equation applies to all business organizations regardless of its size and form.

What is It

Accounting Equation

One important feature of the Statement of Financial Position relates to a very

simple fact that any business must show total assets exactly equal in amount to
the sum of the liabilities and the capital. This relationship exists regardless of the
size of the enterprise or the variety of its assets, liabilities, and ownership interest.
This identity is called the basic accounting equation.

Often it is stated as:

Assets = Liabilities + Owner's Equity

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This equation connotes that the total resources (assets) equals the total amount
owed (liabilities) plus proprietorship ( owner's equity). Other times the equation
appears as:

Assets - Liabilities - Owner's Equity

or

Assets - Owner's Equity = Liabilities

Try to use the following equations in doing the following exercise:

Assets = Liabilities + Owner's Equity

or

Liabilities =Assets - Owner's Equity

or

Owner's Equity = Assets – Liabilities

Given the following data and applying the given equation above, solve for the
missing values and write your answer in the blank spaces provided.

ASSETS LIABILITIES OWNER'S EQUITY

500,000 (c)? 320,000
(a)? 1,400,000 800,000
1,320,000 555,750 (d)?
300,000 140,600 (e)?
(b)? 100,000 460,000

Knowing the above accounting equation, let us define each element used in
making that equation.

What is the Accounting Equation?

The accounting equation is a basic principle of accounting and a fundamental
element of the balance sheet. The equation is as follows:

Assets = Liabilities + Shareholder’s Equity

This equation sets the foundation of double-entry accounting and highlights the
structure of the balance sheet. Double-entry accounting is a system where every
transaction affects both sides of the accounting equation. For every change to an
asset account, there must be an equal change to a related liability or
shareholder’s equity account. It is important to keep the accounting equation in
mind when performing journal entries.

The balance sheet is broken down into three major sections and their various
underlying items: Assets, Liabilities, and Shareholder’s Equity.

17
Accounting Equation Balance Sheet

Below are some examples of items that fall under each section:

Assets: Cash, Accounts Receivable, Inventory, Equipment

Liabilities: Accounts Payable, Short-term borrowings, Long-term Debt
Shareholder’s Equity: Share Capital, Retained Earnings
The accounting equation shows the relationship between these items.

Rearranging the Accounting Equation

The accounting equation can also be rearranged into the following form:

Shareholder’s Equity = Assets – Liabilities

In this form, it is easier to highlight the relationship between shareholder’s equity

and debt (liabilities). As you can see, shareholder’s equity is the remainder after
liabilities have been subtracted from assets. This is because creditors – parties
that lend money – have the first claim to a company’s assets.

For example, if a company becomes bankrupt, its assets are sold and these funds
are used to settle debts first. Only after debts are settled are shareholders entitled
to any of the company’s assets to attempt to recover their investments.

Regardless of how the accounting equation is represented, it is important to

remember that the equation must always balance.

Examples of the Accounting Equation

For every transaction, both sides of this equation must have an equal net effect.
Below are some examples of transactions and how they affect the accounting
equation.

1. Purchasing a Machine with Cash

Company XYZ wishes to purchase a Php500 machine using only cash. This
transaction would result in a debit to Equipment (Php500) and a credit to Cash (-
Php500). The net effect on the accounting equation would be as follows:

Accounting Equation Machine Purchase Cash

This transaction affects only the assets of the equation; therefore there is no
corresponding effect in liabilities or shareholder’s equity on the right side of the
equation.

2. Purchasing a Machine with Cash and Credit

Company XYZ wishes to purchase a Php500 machine but it only has Php250 of
cash in its holdings. The company is allowed to purchase this machine with an
initial payment of Php250 but it owes the manufacturer the remaining amount. It
would result in a debit to Equipment (+Php500), a credit to Accounts Payable
(+Php250), and a credit to Cash (-Php250). The net effect on the accounting
equation would be as follows:

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 Accounting Equation Machine Purchase Credit

This transaction affects both sides of the accounting equation; both the left and
right sides of the equation increase by +$250.

What Is an Asset?

An asset is a resource with economic value that an individual, corporation, or

country owns or controls with the expectation that it will provide a future benefit.
Assets are reported on a company's balance sheet and are bought or created to
increase a firm's value or benefit the firm's operations. An asset can be thought of
as something that, in the future, can generate cash flow, reduce expenses, or
improve sales, regardless of whether it's manufacturing equipment or a patent.

What Is a Liability?

A liability is something a person or company owes, usually a sum of money.

Liabilities are settled over time through the transfer of economic benefits including
money, goods, or services. Recorded on the right side of the balance sheet,
liabilities include loans, accounts payable, mortgages, deferred revenues, bonds,
warranties, and accrued expenses.

What Is Shareholder Equity (SE)?

For corporations, shareholder equity (SE), also referred to as shareholders' equity

and stockholders' equity, is the corporation's owners' residual claim on assets after
debts have been paid. Equity is equal to a firm's total assets minus its total
liabilities.

What’s More

Activity 4: Let’s View It!

Video presentation about Accounting Equation.

Instruction: Watch the video seriously and answer the following guide questions.

Link: https://www.investopedia.com/terms/a/accounting-equation.asp

Guide Questions:

1. What is the video all about?

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__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

2. What is the importance of accounting equation in the preparation of financial

statement?

__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

What I Have Learned

Wow! You have almost done with the topic. At least you have deeper
understanding about accounting, its nature and how it started. Who are the users
of accounting information as presented in the form of financial statements. What
is your realization at this point of our lesson? Were you inspired to become an
accountant someday? Prove it then! If others can do, why can’t you? Am I right?

Instruction: Answer the following questions.

1. What is the meaning of Accounting Concepts and Principles?
__________________________________________________________________________________
__________________________________________________________________________________
2. What are the best known accounting principle?

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__________________________________________________________________________________
__________________________________________________________________________________
3. What is GAAP?
__________________________________________________________________________________
__________________________________________________________________________________
4. What are the 10 principles of accounting?
__________________________________________________________________________________
__________________________________________________________________________________
5. What are the 10 principles of GAAP?
__________________________________________________________________________________
__________________________________________________________________________________
6. What is the accounting equation?
__________________________________________________________________________________
__________________________________________________________________________________
7. What are the 3 formulas of accounting equation?
__________________________________________________________________________________
__________________________________________________________________________________
8. What are assets?
__________________________________________________________________________________
__________________________________________________________________________________
9. What are liabilities?
__________________________________________________________________________________
__________________________________________________________________________________
10. What are shareholder’s equity?
__________________________________________________________________________________
__________________________________________________________________________________

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 Assessment

Let us recapitulate our lesson. To assess the learning you got from Introduction to
Accounting, let’s have the following activity.

Let’s find out!

1. The personal assets of the owner of a company will not appear on the company's
balance sheet because of which principle/guideline?
a. cost c. monetary unit
b. entity d. accrual

2. Which principle/guideline requires a company's balance sheet to report its land

at the amount the company paid to acquire the land, even if the land could be sold
today at a significantly higher amount?
a. cost c. materiality
b. economic entity d. monetary unit

3. Which principle/guideline requires the company's financial statements to have

footnotes containing information that is important to users of the financial
statements?
a. conservatism c. full disclosure
b. economic entity d. verifiability

4. Which principle/guideline justifies a company violating an accounting principle

because the amounts are immaterial?
a. conservatism c. materiality
b. full disclosure d. monetary

5. Which principle/guideline is associated with the assumption that the company

will continue on long enough to carry out its objectives and commitments?
a. economic entity c. time period
b. going concern d. consistency

6. Under this concept, money is used as the unit of measure in preparing the
various reports of the company.
a. conservatism c. monetary unit
b. materiality d. revenue realization

7. Which principle/guideline directs a company to show all the expenses related to

its revenues of a specified period even if the expenses were not paid in that period?
a. cost c. monetary unit
b. matching d. verifiability

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8. When the accountant has to choose between two acceptable alternatives, the
accountant should select the alternative that will report less profit, less asset
amount, or a greater liability amount. This is based upon which principle/guideline?
a. conservatism c. materiality
b. cost d. materiality

9. A company sold merchandise of Php 8,000 to a customer in December. The

company's sales terms require the customer to pay the company in 30 days. The
company's income statement reported the sale in December. This is proper under
which accounting principle/guideline?
a. full disclosure c. revenue recognition
b. monetary unit d. matching

10. Accrual accounting is based on this principle/guideline.

a. cost c. matching
b. full disclosure d. revenue realization

11. The creative chief executive of a corporation who is personally responsible for
numerous inventions and innovations is not reported as an asset on the
corporation's balance sheet. The accounting principle/guideline that prevents the
corporation for reporting this person as an asset is
a. conservatism c. going concerns
b. cost d. disclosure

12. An asset with a cost of $120,000 is depreciated over its useful life of 10 years
rather than expensing the entire amount when it is purchased. This complies with
which principle/guideline?
a. cost c. matching
b. full disclosure d. monetary

13. A retailer wishes to report its merchandise inventory on its balance sheet at its
retail value. This would violate which accounting principle/guideline?
a. cost c. monetary unit
b. full disclosure d. going concern

14. This concept require objective business documents to support every business
transaction.
a. entity c. matching
b. verifiability d. disclosure
15. It divides the life of a business into regular intervals (usually 1 year) at the end
of which financial statements are prepared.
a. time period c. entity
b. consistency d. accrual

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 Additional Activities

Congratulations! You made it until the end of our lesson. I know you’ve
learned so much about Accounting Concepts and Principle and Accounting
Equation. It is not for businesses only but for all of us who personally have
earnings, even in our households
Instruction: Do the following task ask.
1. Watch "Basics of Accounting” in
https://www.youtube.com/watch?v=dc7tZKfKk_w.
2. Applying lessons learned on the different basic accounting concepts, read and
analyze the following independent cases and indicate what concept was applied.
State why you think that particular concept was applied.
Example: Charlotte, the owner of Charlotte's Designer and Tailoring Shop, was able
to secure a personal loan from Citibank. This transaction was not
recorded
in the business' accounting books.
Answer: Entity concept was applied.
Reason: The loan was personal in nature, therefore, the transaction should not be
recorded in the books of Charlotte's Designer and Tailoring Shop since
this
business entity is separate and distinct from its owner, Charlotte.

1. Cash amounting to P20, 000 was received by Charlotte's Designer and

Tailoring Shop from a customer for services to be rendered in the next accounting
period. This amount was not recorded as income of the shop for the current year.

2. Charlotte's Designer and Tailoring Shop continues to render services to his

clients on account.

3. Vicky, C.P.A., prepares annual financial statements for Charlotte's Designer

and Tailoring Shop business in order to monitor the results of its operations.

4. The accountant is tracking the cost of the sewing supplies of the shop taken
by Charlotte, the owner for her personal use.

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25
References

Florendo, J. G., (2016), Fundamentals of Accountancy, Business, and Management

1 First Edition, Chapter 1, pp. 127-

Lopez, R.M. Jr., (2009), Basic Accounting for Non-Accountants

Dr. Valenzuela-Manalo, M., (2016), Learning to Succeed in Business with Accounting.
Pp. 85-86
Hayes, A., 2020 https://www.investopedia.com/terms/s/shareholdersequity.asp
Hayes, A., 2020 https://www.investopedia.com/terms/l/liability.asp
MBA Crystal Ball https://www.mbacrystalball.com/blog/accounting/
Steven https://www.accountingtools.com/articles/2017/5/15/basic-accounting-
principles
Ali, A., https://accounting-simplified.com/financial/accounting-concepts-and-
principles/
Fresh books https://www.freshbooks.com/hub/accounting/generally-accepted-
accounting-principles
Fernando, J., 2021 https://www.investopedia.com/terms/a/accounting-
equation.asp
Corporate Finance Institute, 2015
https://corporatefinanceinstitute.com/resources/knowledge/accounting/ac
counting-equation/

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 DISCLAIMER
This Self-learning Module (SLM) was developed by DepEd – Division of
General Santos City with the primary objective of preparing for and
addressing the new normal. Contents of this module were based on DepEd’s
Most Essential Learning Competencies (MELC). This is a supplementary
material to be used by all learners in General Santos City in all public
schools beginning SY 2020-2021. The process of LR development was
observed in the production of this module. This is version 1.0. We highly
encourage feedback, comments, and recommendations.

For inquiries or feedback, please write or call:

Department of Education – Division of General Santos City

Learning Resource Management System (LRMS)

Tiongson St., Lagao, General Santos City

Telefax No.: (083) 552-8909

Email Address: depedgensan@deped.gov.ph

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