Chapter III

The Accounting Equation

Reported by The 3rd group of the Batch
What we want the entire class to learn:
• We want the students to know what the accounting
Equation is.
• We want the students to be familiar with all the
important terms that are being discussed.
• We want the students to be able to make their own
accounting equation.
The Accounting Equation Definition:
The accounting equation states that a
company's total assets are equal to the
sum of its liabilities and its shareholders'
equity. The accounting equation is also
called the basic accounting equation or the
balance sheet equation.
The Accounting Equation:

The accounting equation states that a company's

total assets are equal to the sum of its liabilities and
its shareholders' equity.
 Definition of Terms:

 Assets- are the economic resources you control that

have resulted from past events and can provide you
with economic benefits.
Basically what this means is:
An asset is a resource controlled by the entity as a result of
past events and from which future economic benefits are
expected to flow to the entity.
 Liabilities- are your present obligations that have resulted
from past events and can require you to give up economic
resources when setting them.
Basically what it means is:
Liabilities is sacrificing money or funds in order for a company to
gain economic benefits. (Lose some to gain some)
 Equity- equity is ownership of assets that may have debts or
other liabilities attached to them. Equity is measured for
accounting purposes by subtracting liabilities from the value
of the assets.
Basically what it means is:
the value an owner could receive in payment for selling
something they own.
 Income- is increase in economic benefits during the period I
the form of increases in assets, or decreases in liabilities,
that result in increase in equity, excluding those relating to
investments by the business owner.
Basically what it means is:
the value or amount that they receive for their labor and
products.
 Expenses- are decreases in economic benefits during the
period in the form of decrease in assets, or increase in
liabilities, that result in decreases in equity, excluding those
relating to distribution to the business owner.
Basically what this means is:
the cost of operations that a company incurs to generate revenue.
As the popular saying goes, “it costs money to make money.”
 Key Takeaways

 The accounting equation is considered to be the foundation of

the double-entry accounting system.
 The accounting equation shows on a company's balance that a
company's total assets are equal to the sum of the company's
liabilities and shareholders' equity.
 Assets represent the valuable resources controlled by the
company. The liabilities represent their obligations.
 The difference between income and expenses represents profit
or loss.
 Application of the accounting equation: You are
presented with the total Equity (Total equity
₱14,942)
If totals assets is ₱27,050 and total liabilities
is ₱12,108, how much is the total equity?
Solution:
Assets= Liabilities + Equity
27,050= 12,108 + Equity
27,050 – 12,108 = Equity
14,942 = Equity
 Applications of the accounting equation: You are
presented with the total Assets ₱39,000.
If total liabilities is ₱20,000 and total equity
is ₱19,000, how much is the total assets?
Solution:
Assets= Liabilities + Equity
Assets= 20,000 + 19,000
Assets= 39,000
 Application of the accounting equation: You are presented
with the total Liabilities ₱10,000
If total assets is ₱13,000 and total equity is
₱3,000, how much is the total liabilities?
Solution:
Assets = Liabilities + Equity
13,000 = Liabilities + 3,000
13,000 – 3,000 = Liabilities
10,000 = Liabilities
 Applications of the accounting equation: You are
presented with the total profit ₱10,000
If total income is ₱13,000 and total expenses
are ₱3,000, how much is the profit or loss?
Solution:
Profit/Loss= Income – Expenses
Profit/Loss= 13,000 – 3,000
Profit= 10,000
 Applications of the accounting equation: You are
presented with the total Assets but you the
income and Expenses are also a factor.
If total income is ₱13,000, total expenses are
₱11,000, total liabilities is ₱10,000, and total
equity (before profit or loss) is ₱9,000, how
much is the total assets?
Solution:
Assets = Liabilities + Equity + Income – Expenses
Assets = 10,000 + 9,000 + 13,000 – 11,000
Assets = 21,000
 References:
 Asian College Fundamentals of Accounting Module.
 Expense - What is an expense? | SumUp Invoices
 Income Definition (investopedia.com)
 Equity Definition (investopedia.com)
 Equities | Financial Times (ft.com)
 Liability - Definition, Accounting Reporting, and Types (corp
oratefinanceinstitute.com
)
That concludes our Report
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