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Accounting Equation
Accounting Equation
Accounting Equation
and its
Components
Business is run through transactions. Transactions are financial in nature and they affect the financial position of
any business. Every transaction increases or decreases Assets, Liabilities, or Capital.
BASIC ACCOUNTING
EQUATION EXPANDED ACCOUNTING EQUATION
LIABILITIES
OWNER’S
EQUITY
ASSETS
REVENUES
EXPENSES
LIABILITIES
OWNER’S
EQUITY
ASSETS
REVENUES
EXPENSES
EXPANDED ACCOUNTING
FURTHER EXPANDED ACCOUNTING EQUATION
EQUATION
LIABILITIES LIABILITIES
REVENUES
EXPENSES EXPENSES
Assets
Assets are general resources that are owned by a
company. Assets help businesses generate revenue.
Assets can be broken down into Current & Non-
Current assets.
OWNER'S EQUITY
301 Abdul, Capital
302 Abdul, Drawings
303 Income and Expense Summary
ABDUL ENTERPRISE
CHART OF ACCOUNTS
CODE REVENUE
401 Service Income
402 Interest Income
EXPENSES
501 Salaries and Wages Expense
502 Utilities Expense
503 Depreciation Expense
504 Interest Expense
505 Rent Expense
506 Insurance Expense
507 Communication Expense
508 Store Supplies Expense
509 Advertising Expense
510 Office Supplies Expense
511 Miscellaneous Expense
Effects of Transactions on the Accounting
Equation
Let's assume that J. Ott forms a sole proprietorship called Accounting Software Co. (ASC). On December 1, 2022, J.
Ott invests personal funds of $10,000 to start ASC. The effect of this transaction on ASC's accounting equation is:
On December 2, 2022, J. Ott withdraws $100 of cash from the business for his personal use. The effect of this
transaction on ASC's accounting equation is:
Sole Proprietorship Transaction #3.
On December 3, 2022, Accounting Software Co. spends $5,000 of cash to purchase computer equipment for use in
the business. The effect of this transaction on the accounting equation is:
The combined effect of the first three transactions is shown here:
On December 4, 2022, ASC obtains $7,000 by borrowing money from its bank. The effect of this transaction on the
accounting equation is:
The combined effect on the accounting equation from the first four transactions is:
On December 5, 2022, Accounting Software Co. pays $600 for ads that were run in recent days.
The combined effect on the accounting equation from the first five transactions is:
On December 6, 2022, ASC performed consulting services for its clients. The clients were billed for the agreed upon
amount of $900. The amounts are to be paid within 30 days.
The combined effect on the accounting equation from the first six transactions is :
On December 7, 2022, ASC uses a temporary help service for 6 hours at a cost of $20 per hour. ASC will pay the
invoice when it is due in 10 days.
The combined effect on the accounting equation from the first seven transactions is :
On December 8, 2022, ASC received $500 from the clients it had billed on December 6, 2022.
The combined effect on the accounting equation from the first eight transactions is :
RECALL
ASSETS = LIABILITIES + EQUITY
In accounting, Debit means the left side of an account and Credit means the right side of an account.
Knowing whether to debit or credit an account depends on the Type of Account and that account’s Normal Balance.
An account’s Normal Balance is based on the Accounting Equation and where that account is in the equation.
The account types are Asset, Liability, Owner’s Equity, Revenue, and Expense.
To increase an Asset, , or Expense account, we debit. To decrease those accounts, we credit. To increase an
Owner’s Equity (Capital), Revenue, or Liability account, we credit. To decrease those accounts, we debit.
DEBITS AND CREDITS
To balance your books, use debits and credits. Debits and credits are equal but opposite entries in your accounting
books. If a debit decreases an account, you will increase the opposite account with a credit.
A debit is an entry made on the left side of an account while a credit is an entry on the right side.
Record credits and debits for each transaction that occurs. With double-entry in accounting, record two or more
entries for every transaction.
Check out this chart to see how each type of account is impacted:
Books of Accounts are the accounting books
where business transactions are recorded.
Journalizing is the
process of recording in
the journal.
WHAT ARE THE SPECIAL JOURNALS?
Aside from General Journal and Ledger, businesses also use Special
Journals. These are multi-column journals that have columns reserved
for specific transaction.
These accounting books are prescribed to ease the recording of the
business owner or their bookkeeper. The four (4) common special
journals are:
Cash Receipts
This is one of the books of accounts you use to record all cash received
by the business.
Cash Payment
This is one of the books of accounts you use to record all cash paid by
the business.
Sales
This is one of the books of accounts you use to record all sales including
sales of merchandise on account.
Purchase Journal
This is one of the books of accounts you use to record all purchases and
disbursements including purchase of merchandise on account.
General Ledger
This is called the book of final entry. In this book, you can see the
ending balance of each account you record in General Journal
and Special Journals.
3 columns
Four (4)-column Ledger
Cash 100
Balance
4 columns
Manual Books of Account
These method is done using a traditional books you find in a books and office supplies store.
Manual Books of Accounts are mostly used by micro and small businesses because it’s the
easiest to register in the BIR. Recording is hand written.
You are not required to renew and re-stamp your books to BIR annually. They are only
renewed if your books are already exhausted or used.
Loose-leaf Books of Account
This method is done using spreadsheet like Microsoft Excel. Some companies uses simple
Quickbooks for their bookkeeping and just export their reports in Microsoft Excel. Those
who uses this method are required to submit permanently bind loose-leaf forms within 15
days after the end of each taxable year or upon termination of its use.
Computerized Books of Account
This is mostly used by big companies. This method is done using complex accounting
software. Generation of Invoices and receipts are usually computerized.
Those who uses this method are required to submit reports in CD and other requirements
within 30 days after the end of each taxable year or upon termination of its use.
Computerized
Manual Loose-leaf
Accounting System
Requires Permit to
No Yes Yes
Use