ACCOUNTING

EQUATION
OBJECTIVES:
Explain the elements of accounting.
Solve exercises on accounting principles as
applied in various transactions.
Illustrate the accounting equation.
Perform operations involving simple
transactions using the accounting equation.
The accounting equation
In accounting, it is understood that every business
activity always has a two-sided effect on the business.
This two-sided effect is best illustrated in the
accounting equation, which states that the asset of the
business entity should always be equal to the
business’s total capital added to its total liabilities.
Importance of the accounting equation
Business transactions affect the assets, liabilities, and
capital of the business. These affects can be expressed
in the accounting equations.
Assets = Equities
Equity is the right, claim or interest of a person over
the assets of the business
BIG IDEA
Just like any equation, the accounting
equation means the right and left sides equal.
Thus, the assets on the left should equal the
liabilities and capital on the right.
 Asset = Liabilities + Capital

Assets, liabilities and capital are the

three elements of accounting.
Assets
Refers to goods, services, and other resources that the
business entity acquired and have control over.
Are properties of the entity that are expected to be
utilized for its benefit.
They may be tangible (such as cash, stocks, machinery,
equipment, furniture, and land) or intangible (such as
trademarks and patent rights).
Liabilities
Are the entity’s payables, such as accounts payable,
and notes payable, to the service, good, or resource
providers.

Capital
On the other hand, refers to the amount of equity of
the business owners.
Equity
Is the resulting amount when the total assets are
subtracted from the total liabilities.
Investment (initial and additional) and income
(revenue and gains) increase the entity’s capital, while
withdrawals made by the owners as well as the entity’s
expenses decrease it.
Capital and liabilities can be computed by rewriting
the basic accounting equation as follows:
Capital = Assets – Liabilities
Liabilities = Assets - Capital
Study how the transaction in the Fine Apparel
Fashion Boutique run by Frances Angel.
Frances angel has her accountant set up the
books to reflect the transactions when they
started their operations on 15 April
Transaction 1 – Capitalization
At the opening of the fashion boutique, only
the owner’s initial investment of P850 000.00
is in the books.
Date Transaction Assets (P) Liabilities Capital (P)
= (P) +
15 April Owner’s 850 000 850 000
investment
(Initial)
Transaction 2 and 3 – Commissioning of customized cabinets
On 18 April, Frances angel closed her agreement with a
cabinet designer for custom-made cabinets for her boutique.
The quote is for P150 000 but she has to pay P25 000 as the
deposit, which will be deducted when the cabinets are
delivered and installed at the boutique. On 20 April, the
cabinets delivered and installed but no final payment has
been
Date made. Transaction Assets (P) = Liabilities (P) Capital (P)
+
18 April Deposit for the 25 000
cabinet works
Cash payment (25 000)
20 April Cabinet-made 125 000 125 000
display cabinet
Transaction 4 and 5 – Rent Payment
By 20 April, Frances Angel was able to close the deal for the
rental of stall in Happy Mall. The transaction involved a
down payment of P20 000 and an advanced rental payment
of P10 000.
Date Transaction Assets (P) = Liabilities (P) Capital (P)
+
20 April Rental for the (20 0000) (20 000)
stall in Happy
Mall
20 April Advance deposit (10 000)
for rental
Prepaid rent
10 000
Transaction 6 – Payment of delivery for customized cabinets

On 20 April, the customized cabinets were delivered to

the boutique and Frances Angel has to pay the balance
of P125 000 to the cabinet designer. The actual
payment was made on 30 April.

Date Transaction Assets (P) Liabilities Capital (P)

= (P) +
30 April Payment of (125 000) (125 000)
balance for the
customized
cabinets
Transaction 7 and 8 – Delivery of clothes, shoes, and
accessories to be sold
On 5 May, the clothes as well as the accessories that
will be put up for sale were delivered. The term
payment is 60 days. The accessories consist bags, belts,
wallets, bracelet, necklaces, hair barrettes and
headbands. The clothes cost P165 000, while the shoes
and accessories cost P57 850.

Date Transaction Assets (P) = Liabilities (P) + Capital (P)

ANSWER
Date Transaction Assets (P) Liabilities Capital (P)
= (P) +
5 May Purchases – 222 850 (165 000)
Clothes

Purchases - Shoes/ (57 850)

Accessories
Transaction 9 – Delivery of the custom-made store bags with
the Fine Apparel Logo
Customized store bags were ordered on cash-on-
delivery arrangement. Thus, with the delivery of 500
pieces of store bags on 10 May with the Fine Apparel
Fashion Boutique logo, Frances Angel has to pay P1
250.
Date Transaction Assets (P) Liabilities Capital (P)
= (P) +
10 May Purchases Store
supplies – Store
bags
Cash payment (1 250) (1 250)
Transaction 10 and 11 – Payment For the printed receipts and
proceeds of Bank Business Loan
Frances Angel registered her business under the Fine
Apparel Fashion Boutique name and got the permit to
print the receipts. She earlier ordered the receipts and
they were delivered to her on 24 May. She has to pay
the printer P1 500 for the receipts. On the same date,
she received the proceeds of her business loan form We
Do It Your Way (WDIYW) Bank in the amount of P350
000.
Date Transaction Assets (P) Liabilities Capital (P)
= (P) +
24 May Payments for (1 500) (1 500)
receipts

24 May Loan from the 350 000 350 000

bank
Transaction 12 – Soft opening of the Fine Apparel Fashion
Boutique
On 29 May, Frances Angel had the soft opening of the
Fine Apparel Fashion Boutique. For the occasion, she
commissioned a caterer to provide light snacks and
drinks between 10 AM and 2 PM to attract potential
customers to her store and entertain guest who wished
her well new business enterprise.
The caterer’s services cost the boutique P4 500.
Date Transaction Assets (P) Liabilities Capital (P)
= (P) +
29 May Caterer for soft (4 500) (4 500)
opening
Transaction 13, 14, 15, and 16
Simultaneously with the soft opening, Frances Angel’s
boutique was able to make a sale of two pieces of
clothing and accessories. The total sales amounted to
P4 850 but as credit. The boutique also sold different
pieces of apparel as follows: 30 May – four pieces of
clothing amounting P6 585 and one pair of shoes
amounting to P850, 31 May – two pieces of clothing
amounting P 2 850
Date Transaction Assets (P) Liabilities Capital (P)
= (P) +
Date Transaction Assets (P) Liabilities (P) Capital (P)
= +
29 May Receivable
4 850
Credit Sales 4 850
30 May Cash
6 585
Sales – Clothing 6 585
30 May Cash
850
Sales - Shoes 850
31 May Cash
2 850
Sales – Clothing 2 850
Transaction 17 and 18
On 1 June, France Angel’s fashion boutique was
able to sell three bridesmaids dresses for a total of
P7 500 plus three pairs of shoes amounting to P3
000.
Date Transaction Assets (P) Liabilities Capital (P)
= (P) +
1 June Cash sales – 3 7 500 7 500
dresses
1 June Cash sales – 3 3 000 3 000
pairs of shoes
Transaction 19, 20, 21 and 22
On 3 June, Frances Angel was involved in a minor
car accident. She had to withdraw P25 000 to fix
her car. On the same day, the Fine Apparel
Fashion Boutique was able to collect the credit
sales it had on 29 May amounting P4 850. France
Angel also had to pay her sale clerks and cashier a
total of P6 500 for a week’s work.
Date Transaction Assets (P) Liabilities (P) Capital (P)
= +
3 June Withdrawal from
investment (25 000) (25 000)
3 June Collection
Credit sales 4 850
3 June Sales
Receivable (4 850)
3 June payroll – 3 staff
(6 500) (6 500)