Accounting Equation

and Rules of Debit

and Credit
The Basic Accounting
Equation
According to the dual aspect concept, every transaction has two aspect. One is debited and
one is credited. This concept of accounting forms an equation that is called “Accounting
Equation.”
Sample problem:
If John Company has a total asset of ₱500,000 and liability of
₱300,000 from Mary Company, how much is the total Equity?

Sol’n:

E=A-L
E = ₱500,000 - ₱300,000
E = ₱200,000
Equity or Owner’s Equity
Owner’s equity is equal to Total Assets minus Total Liabilities. It also represents the
ownership claim on total assets. There are various factors that affects Equity or Capital
account:

• Capital/ Capital Investment/ Owner’s Investment

• Net Profit or Loss
• Dividend Payments
• Equity Withdrawal
Equity or Owner’s Equity

To compute for the balance of Owner’s Equity, the formula below should be followed:

Beginning Balance xx
Add: Owner’s Investment xx
Net Income xx

Less: Withdrawal xx
Net Loss xx
Dividends paid xx
Ending Balance of Owner’s Equity
Sample problem:
On January 1, 2023, Pedro initially put a total of ₱500,000 as his initial investment for his business.
On the same month he earned a total net income of ₱50,000. By the end of January, he withdraw a
total of ₱10,000 to buy something. Find the balance of Owner’s Equity by the end of January

Beginning Balance -
Add: Owner’s Investment ₱500,000
Net Income ₱50,000

Less: Withdrawal (₱10,000)

Net Loss (-)
Dividends paid (-)
Owner’s Equity by the end of January ₱540,000
Sample problem:
Beginning Balance -
Add: Owner’s Investment ₱500,000
Net Income ₱50,000

Less: Withdrawal (₱10,000)

Net Loss (-)
Dividends paid (-)
Owner’s Equity by the end of January ₱540,000

Please take not also that the ₱540,000 ending balance in January will be the
beginning balance for the month of February.
Expanded Accounting
Equation
The expanded accounting equation is a form of the basic accounting equation that includes
the distinct components of owner's equity, such as dividends, shareholder capital, revenue,
and expenses. The expanded equation is used to compare a company's assets with greater
granularity than provided by the basic equation.
Expanded Accounting
Equation
Rules and Application of
Debit and Credit
The expanded accounting equation is a form of the basic accounting equation that includes
the distinct components of owner's equity, such as dividends, shareholder capital, revenue,
and expenses. The expanded equation is used to compare a company's assets with greater
granularity than provided by the basic equation.
Rules and Application of
Debit and Credit
The following are the rules of debit and credit which guide the system of accounts, they are
known as the Golden Rules of accountancy:

The following are the rules of debit and credit which guide the system of accounts, they are
known as the Golden Rules of accountancy:

• First: Debit what comes in, Credit what goes out.

• Second: Debit all expenses and losses, Credit all incomes and gains.
• Third: Debit the receiver, Credit the giver.
Rules and Application of
Debit and Credit

A debit and credit entry have a broad impact on different accounts. For example, in
• Asset accounts, a debit increases the balance and a credit decreases the balance.
• Liability accounts, a debit decreases the balance and a credit increases the balance.
• Equity accounts, a debit decreases the balance and a credit increases the balance.
• Revenue accounts, a debit decreases the balance and a credit increases the balance
Rules and Application of
Debit and Credit
Rules and Application of
Debit and Credit

Example 1 : Ella purchased new equipment for

your company for $15,000.

Equipment $15,000
Cash $15,000
Rules and Application of
Debit and Credit

Example 2: John purchased $1,000 in inventory from a vendor

with cash.

Inventory $1,000
Cash $1,000
Rules and Application of
Debit and Credit

Example 3: You make a $500 sale to a customer who pays with

credit.

Accounts Receivable $500

Sales Revenue $500
Accounting Transaction
and Events

Any Economic Events that affects company’s assets, liabilities or equity at the time of the event.

Accounting Transactions are two types:

• External Transactions

• Internal Transactions
 External Transactions

An external transaction, also known as a business transaction, is a trade of goods and services for
money. This takes place between company and an external party.

For example, if a company purchases from a supplier the raw materials needed for the
manufacturing of its goods, this would be categorized as an external event. When a company
receives payment from a customer, this would also be an external event that it would need to record
in its financial statements.
Internal Transactions

An internal transaction involves the exchange of assets and funds within the business. For instance,
the payment of employees is an internal transaction because funds are paid to an individual within
the company in exchange for their labor..
Internal Transactions

An internal transaction involves the exchange of assets and funds within the business. For instance,
the payment of employees is an internal transaction because funds are paid to an individual within
the company in exchange for their labor..
Assessment: Identify if the transactions given are Internal or External.

• Depreciation of a fixed asset

• Issuing a promisory note to a bank

• Provision of goods and services to another business branch or unit

• payment of cash to a creditor

The End
Thank you for listening