Accounting equation

1. THE ACCOUNTING
EQUATION
The learners shall be able to illustrate the accounting equation
(ABM_FABM11-IIIb-c-17);
Perform operations involving simple cases with the use of the
accounting equation (ABM_FABM11-IIIb-c-18)

2. OBJECTIVES
• Understand the elements of the accounting
equation
• Use the accounting equation to solve problems

3. A = L + OE
Assets = Liabilities + Owner’s
Equity

4. ASSETS INVESTED BY THE OWNER
• July 1 - Paolo Reyes started a delivery service
on July 1, 2013. The following transactions
occurred during the month of July. He
invested PHP800,000 cash and cars
amounting to PHP200,000

5. BORROWINGS FROM THE BANK
• July 2 – Reyes borrowed PHP100,000 cash
from PNB for use in his business.

6. ASSET PURCHASED FOR CASH
• July 7 – Bought tables and chairs from Orocan
and paid PHP45,000 cash

7. ASSETS PURCHASED ON ACCOUNT
• July 15 – Various equipment were purchased
on account from Fortune for PHP55,000

8. CASH WITHDRAWAL BY THE OWNER
• July 18 – Reyes made a cash withdrawal of
PHP5,000 for personal use

9. PAYMENT OF LIABILITY
• July 20 – The account due to Fortune was paid
in cash

10. DETERMINING PROfiT THROUGH OPERATION
• Accrual basis of accounting vs Cash basis of accounting –
accrual basis recognizes revenue when earned and
recognizes expenses when incurred • Under the expense
recognition principle, expenses can be recognized either as:
(1) matching; (2) systematic allocation, or; (3) direct
association.
• Profit measures the performance of the company. If the
revenue exceeds expenses, then it is a net profit; otherwise,
it is a net loss.

11. For each transaction, tell whether the assets, liabilities, and
owners equity will increase (I), decrease (D) or not affected (NA).
TRANSACTION A L OE
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.
6. The owner contributes her personal truck to the business.
7. The company purchases supplies on credit.
8. The company purchases land by paying half in cash and signing a
note.
9. The owner withdraws cash for personal use.
10. The company repays the suppliers.

12. For each transaction, tell whether the assets, liabilities, and
owners equity will increase (I), decrease (D) or not affected (NA).
TRANSACTION A L O
E
1. The owner invests personal
cash in the business.
2. The owner withdraws
business assets for personal use.

13. For each transaction, tell whether the assets, liabilities, and
owners equity will increase (I), decrease (D) or not affected (NA).
TRANSACTION A L O
E
3. The company receives cash
from a bank loan.
4. The company repays the bank
that had lent money.

14. For each transaction, tell whether the assets, liabilities, and
owners equity will increase (I), decrease (D) or not affected (NA).
TRANSACTION A L O
E
5. The company purchases
equipment with its cash.
6. The owner contributes her
personal truck to the business.

15. For each transaction, tell whether the assets, liabilities, and
owners equity will increase (I), decrease (D) or not affected (NA).
TRANSACTION A L O
E
7. The company purchases
supplies on credit.
8. The company purchases land
by paying half in cash and
signing a note.

16. For each transaction, tell whether the assets, liabilities, and
owners equity will increase (I), decrease (D) or not affected (NA).
TRANSACTION A L O
E
9. The owner withdraws cash for
personal use.
10. The company repays the
suppliers.

17. GENERALIZATION
• the accounting equation is Assets = Liabilities + Equity
• for every transaction, the accounting equation should
always be balanced.
• Assets are resources owned by the business
• Liabilities are obligations by the business.
• Equity is the residual interest of the owner of the
business. Meaning, any assets left after paying liabilities
is the right of the owner of the business.
• four elements that affect equity: (1) Investment; (2)
Withdrawal; (3) Revenue, and; (4) Expenses.

18. Describe each transaction.

19. ASSIGNMENT: Mr. Garcia started a new business
and completed these transactions during August.
Aug 1 Garcia invested ₱48,000.00 cash in the business.
Aug 1 Rented office space and paid ₱800.00 cash for
August rent.
Aug 3 Purchase exploration equipment for