Lecture 2:

The Accounting Equation

by Professor Paul John J. Capote
 Lesson Objectives:

1) To define the categories of the accounting

equation; and

2) To classify economic transactions in the

categories of the accounting equation.
 Lesson Objective
1) To define the categories of the accounting equation.
Lesson Objective: 1) To define the categories of the accounting equation.

The accounting equation is a basic principle of

accounting and a fundamental element of the
balance sheet.

Source: corporatefinanceinstitute.com
Lesson Objective: 1) To define the categories of the accounting equation.

ASSETS = LIABILITIES + EQUITY

LIABILITIES = ASSETS - EQUITY

EQUITY = ASSETS - LIABILITIES

Source: corporatefinanceinstitute.com
Lesson Objective: 1) To define the categories of the accounting equation.

ASSETS = LIABILITIES + EQUITY

 Are resources controlled by the entity as a result of past events and
from which future economic benefits are expected to flow to the
entity (IASB Framework)
 Current Asset and Non-Current Asset

 Cash, Accounts Receivable, Notes Receivable, Interest Receivable,

Equipment, Building, Land, Accumulated Depreciation, Inventory,
Supplies, Furniture and Fixtures, and Prepaid Expenses

Source: corporatefinanceinstitute.com
Lesson Objective: 1) To define the categories of the accounting equation.

ASSETS = LIABILITIES + EQUITY

 Are financial obligations of an entity that result in the entity’s future
sacrifices of economic benefits to other entities.

 Current Liability and Non-Current Liability

 Accounts Payable, Notes Payable, Interest Payable, Tax Payable,

Salary Payable, Bank Account Overdraft, Accrued Expenses, Short-
Term Loans
Source: corporatefinanceinstitute.com
Lesson Objective: 1) To define the categories of the accounting equation.

ASSETS = LIABILITIES + EQUITY

 Net amount of funds invested in a business by its owners, plus any
retained earnings.
 Shareholders’ Equity (e.g. common stock, preferred stock,
contributed surplus, additional paid-in capital, retained earnings,
treasury stock)
 Accounts Payable, Notes Payable, Interest Payable, Tax Payable,
Salary Payable, Bank Account Overdraft, Accrued Expenses, Short-
Term Loans
Source: accountingcoach.com
 Lesson Objective
2) To classify economic transactions in the categories of the accounting equation
 Lesson Objective
2) To classify economic transactions in the categories of the accounting equation
Lesson Objective: 2) To classify economic transactions in the categories of the accounting equation

Transaction 1:

Mr Right started his business by investing P200,000.

ASSETS = LIABILITIES + EQUITY

Owner’s
Cash Equity
Lesson Objective: 2) To classify economic transactions in the categories of the accounting equation

Transaction 2:

Mr Right purchased office supplies in cash,

₱15, 000

ASSETS = LIABILITIES + EQUITY

Cash
Office
Supplies
Lesson Objective: 2) To classify economic transactions in the categories of the accounting equation

Transaction 3:

Mr Right purchased additional office supplies from

Star Marketing on credit, ₱25, 000

ASSETS = LIABILITIES + EQUITY

Office Account
Supplies Payable
Lesson Objective: 2) To classify economic transactions in the categories of the accounting equation

Transaction 4:

Mr Right paid Star Marketing in full cash

ASSETS = LIABILITIES + EQUITY

Account
Cash
Payable
Lesson Objective: 2) To classify economic transactions in the categories of the accounting equation

Transaction 5:

Mr Right withdrew ₱30,000 for personal use.

ASSETS = LIABILITIES + EQUITY

Owner’s
Cash
Drawing
Lesson Objective: 2) To classify economic transactions in the categories of the accounting equation

Transaction 6:

Mr Right paid the salaries of the employees.

ASSETS = LIABILITIES + EQUITY

Salary
Cash
Expense
Lesson Objective: 2) To classify economic transactions in the categories of the accounting equation

Transaction 6:

Mr Right purchased equipment from Ann Lee Rice

Hardware in notes.

ASSETS = LIABILITIES + EQUITY

Note
Equipment
Payable
Lesson Objective: 2) To classify economic transactions in the categories of the accounting equation

Transaction 7:

Mr Right paid the rent for office space.

ASSETS = LIABILITIES + EQUITY

Rental
Cash
Expense
Lesson Objective: 2) To classify economic transactions in the categories of the accounting equation

Quiz No. 1
1) Atty G. Concepcion began the practice of law by
investing P20,000 in cash and a law library of
P30,000.
a. Increase in assets=increase in proprietorship

b. Increase in liabilities=increase in proprietorship

c. Increase in assets=increase in liabilities

Lesson Objective: 2) To classify economic transactions in the categories of the accounting equation

Quiz No. 1

2) Paid the monthly rental of the office space P2,000.

a. Increase in assets=increase in proprietorship

b. Increase in liabilities=increase in assets

c. decrease in assets=decrease in proprietorship

Lesson Objective: 2) To classify economic transactions in the categories of the accounting equation

Quiz No. 1

3) Purchased office equipment, P5,000 and office

supplies, P1,000 for cash.

a. Increase in assets=increase in proprietorship

b. Increase in one form of asset=decrease in another form of assets

c. increase in assets=increase in liabilities

Lesson Objective: 2) To classify economic transactions in the categories of the accounting equation

Quiz No. 1

4) Completed legal work for S. Cuneta and

collected P4,000 cash.

a. Increase in assets=increase in proprietorship

b. Increase in one form of asset=decrease in another form of assets

c. increase in assets=increase in liabilities

Lesson Objective: 2) To classify economic transactions in the categories of the accounting equation

Quiz No. 1

5) Purchased additional office equipment from M.

Soriano on credit, P5,500.

a. Increase in assets=increase in proprietorship

b. Increase in assets=increase in liabilities

c. decrease in assets=decrease in proprietorship

Lesson Objective: 2) To classify economic transactions in the categories of the accounting equation

Quiz No. 1

6) Paid the semi-monthly salary of the office

secretary, P3,250.

a. Increase in assets=increase in proprietorship

b. Increase in assets=increase in liabilities

c. decrease in assets=decrease in proprietorship

Lesson Objective: 2) To classify economic transactions in the categories of the accounting equation

Quiz No. 1

7) Completed legal work for J. de Belen on credit,

P1,500.

a. Increase in assets=increase in proprietorship

b. Increase in assets=increase in liabilities

c. decrease in assets=decrease in proprietorship

Lesson Objective: 2) To classify economic transactions in the categories of the accounting equation

Quiz No. 1

8) Paid one-half of the amount due to M. Soriano.

a. Increase in assets=increase in proprietorship

b. Increase in assets=increase in liabilities

c. decrease in assets=decrease in liabilities

Lesson Objective: 2) To classify economic transactions in the categories of the accounting equation

Quiz No. 1

9) De Belen paid her account in full.

a. Increase in assets=increase in proprietorship

b. Increase in one form of asset=decrease in another form of asset

c. Increase in assets=increase in liabilities

Lesson Objective: 2) To classify economic transactions in the categories of the accounting equation

Quiz No. 1

10) Withdrew P1,000 for personal use.

a. Increase in assets=increase in proprietorship

b. Increase in assets=increase in liabilities

c. Decrease in assets=decrease in proprietorship