Fundamentals of Accountancy, Business, and Management 1

Lesson 4: The Accounting Equation

BREAK A LEG!
 The Accounting Equation

Assets = Liabilities + Capital

• Assets are goods, services, and other resources that the business entity acquired
and have control over. (values owned by the business)
• Assets are properties of the entity that are expected to be utilized for its benefit.
• Assets may be tangible and intangible
1. Cash
2. machines
3. trademarks
4. copyrights
5. equipment
BREAK A LEG!
 The Accounting Equation

Assets = Liabilities + Capital

• Liabilities anything that increase the debt or obligation of the business
organization. (values owed by the business)
• Something that the business has to pay or that it owes from someone or another
entity and can potentially reduce the value of the business if not enough income
comes into the business.
accounts payable
loans payable
notes payable
salaries payable
interest payable BREAK A LEG!
 The Accounting Equation

Assets = Liabilities + Capital

• Capital refers to the amount of equity of the business owners.
• It represents the investment of the owner or proprietor.
• The net amount/income that will remain after all liabilities or obligations have
been paid from the assets.
• The share of the owner in the assets of the business
POTTER, CAPITAL
POTTER, DRAWINGS
Capital = Assets – Liabilities
Liabilities = Assets - Capital
BREAK A LEG!
 The Accounting Equation
Assets invested by the owner:
July 1 – Sir Gelo started a delivery service on July 1, 2013. The following
transactions occurred during the month of July. He invested Php. 800,000 cash
and Cars amounting to Php. 200,000.
ASSETS = LIABILITIES + OWNER’S EQUITY
Cash Php. 800,000 Reyes, Capital Php. 1,000,000
Cars Php. 200,000

Php. 1,000,000 Php. 1,000,000

BREAK A LEG!
 The Accounting Equation
Borrowings from the bank:
July 2 – Gelo borrowed Php. 100,000 cash from PNB for use in business.

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash Php. 900,000 Loans Payable Php. 100,000 Reyes, Capital Php. 1,000,000
Cars Php.
200,000
Php. 1,1000,000 Php. 1,100,000

BREAK A LEG!
 The Accounting Equation
Assets purchased for cash:
July 7 – Bought tables and chairs from Orocan and paid Php. 45,000 cash.

ASSETS = LIABILITIES + OWNER’S EQUITY

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

BREAK A LEG!
 The Accounting Equation
Assets purchased on account:
July 15 – Various equipment were purchased on account from Fortune for Php
55,000

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash Php. 855,000 Loans Payable Php. 100,000 Reyes, Capital Php. 1,000,000
Cars Php. Accounts Payable Php. 55,000
200,000
Furnitures Php. 45,000
Equipment Php. 55,000
Php. 1,155,000 Php. 1,155,000

BREAK A LEG!
 The Accounting Equation
Cash withdrawal by the owner:
July 18 – Gelo made a cash withdrawal of Php. 5,000 for personal use.

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash Php. 850,000 Loans Payable Php. 100,000 Reyes, Capital Php. 1,000,000
Cars Php. Accounts Payable Php. 55,000 Reyes, Drawing (Php. 5,000)
200,000
Furnitures Php. 45,000
Equipment Php. 55,000
Php. 1,150,000 Php. 1,150,000

BREAK A LEG!
 The Accounting Equation
Payment of liability:
July 20 – The account of Fortune was paid in Cash

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash Php. 795,000 Loans Payable Php. 100,000 Reyes, Capital Php. 1,000,000
Cars Php. Reyes, Drawing (Php. 5,000)
200,000
Furnitures Php. 45,000
Equipment Php. 55,000
Php. 1,095,000 Php. 1,095,000

BREAK A LEG!
 The Accounting Equation BREAK A LEG!

Sir Gelo’s Delivery Services

Worksheet
For the period June 1 to June 20 (In Philippine Pesos)
Date Assets = Liabilities + Owner’s Equity
July Cash Cars Furnitures Equipment Loans Accounts Gelo, Geo,
Payable Payable Drawings Capital
1 800,000 200,000 1,000,000
2 100,000 45,000 100,000
7 (45,000)
15 55,000 55,000
18 (5,000) (5,000)
20 (55,000) (55,000)
BALANCES 795,000 200,000 45,000 55,000 100,000 0 (5,000) 1,000,000

Php. 1,095,000 = Php. 1,095,000

 TASK 3
BREAK A LEG!

For each transaction, tell whether the assets, liabilities, and equity will
increase (I), decrease (D), or is no effect (NE).
A L E
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 had lent money ___ ___
___
5. The company purchases equipment with its cash ___ ___
___