accounting equation accounting small business

1. Fundamentals of Accountancy,
Business and Management 1
Accounting Equation

2. Directions: Read the statement carefully and write TRUE if the statement is correct
and FALSE if not. Write your answers on a separate sheet of paper.
____________ 1. Accounting equation has two (2) sides.
____________ 2. Asset is equal to the total of liabilities and owner's equity.
____________ 3. Assets, liabilities, and owner’s equity are the components of the
accounting equation.
____________ 4. Assets are the resources borrowed by the owner.
____________ 5. If the business has liabilities it has obligations.

3. ____________ 6. There are three (3) elements that affect equity account.
____________ 7. Investments affect the owner's equity account.
____________ 8.Assets and liabilities increase when the business purchases supplies on account.
____________9. There is an increase in liability when you buy equipment on account.
___________10. If there is Php 500,000.00 worth of assets and Php 200,000.00 worth of liabilities,
then there is Php 300,000.00 worth of owner's equity.

4. Accounting Equation

5. Accounting Equation
Formulas and equations are important to solve a certain mathematical problem not
only in the fields of Mathematics and Science but also in Accounting. Its equation has two
sides - the left and the right side. The left side of the equation is the company’s assets and
the liabilities and equity are shown on the right side.
The accounting equation is composed of asset, liabilities, and owner's equity. The asset
is the sum of liabilities and owner's equity, while liability is the difference after the owner’s
equity is deducted to asset. Equity is the money that is bought by owners of the company for
running the business. There is also an extended accounting equation where revenue and
expenses are added.
Accounting equation is the foundation of other accounting formulas. This helps one
avoid confusions on computing assets, liabilities, or owner's equity.

6. Directions: Analyze the problem carefully and answer the questions that follow.
Write your answers on a separate sheet of paper.
Hannah Mae Vista graduated as summa cum laude with the degree of B.S. Accountancy and got
her job through her brother’s recommendation. She has served as an accountant on Vista Accounting
Firm for three years. She has been very passionate about her work since it was her dream to be an
accountant. One day, when she was doing the financial reports of the company, she noticed that the
debit and the credit sides were not balanced. She kept finding the errors but found none.
Unexpectedly, Hannah’s boss approached and told her that he got cash amounting to Php 100,000.00
for personal use but he refused to record it as drawings or withdrawals. Her boss wanted to record
the Php 100,000.00 as expenses even though it was used for his personal obligations.
Questions:
1. What is/are the principle/s being violated in the problem presented?
2. Is it a right decision for Hannah to record the supposed to be drawings as
expenses? Justify your answer.

7. Rubrics
Exemplary
5pts.
Good
3pts.
Poor
1pt.
Quality of
Information
Information clearly relates
to the main topic and add
new concepts.
Information somehow
clearly relates to the main
topic.
Information has little or
nothing to do with the
main topic.
Critical Thinking It enhances the critical
thinking process
consistently
through reflection.
Some critical thinking and
reflection is
demonstrated.
It does not answer the
question/s.

8. Directions: Compute the missing amount in the equation. Write your answers on a separate sheet of
paper.
Assets Liabilities Owner's equity
1. ? Php 100,000.00 Php 50,000.00
2. Php 230,000.00 ? Php 200,000.00
3. Php 109,000.00 Php 9,000.00 ?
4. Php 650,000.00 ? Php 500,000.00
5. ? Php 90,000.00 Php 700,000.00
6. Php 456,000.00 Php 67,000.00 ?
7. Php 2,716,217.00 ? Php 1,729,000.00
8. Php 729,879.00 Php 167,000.00 ?
9. ? Php 123,456.00 Php 789,100.00
10. Php 15,676.00 ? Php 13,780.00

9. Remember that accounting equation must be balanced for each transaction. It means that the asset
should be equal to the total of liabilities and owner's equity. The formula below shows that the asset
is the sum of liabilities and owner's equity.
A = L + OE
The accounting equation consists of three (3) major accounts:
1. Assets are the items that a company owns that can provide future economic benefit. Assets are
valuable resources controlled by the company. Examples of assets are cash, supplies, accounts
receivable, and more.

10. 2. Liabilities are the financial obligation of a company that results in the company’s
future sacrifices of economic benefits to other businesses. Some of its examples are
loans and accounts payable.
3. Equity is the money that is bought by owners of the company for running the
business. It is the residual interest of the owners which means any asset left
after paying liabilities is the right of the owner of the business.
Four elements that affect equity:
a. Investment is an asset or item acquired with the goal of generating income
or appreciation.
b. Withdrawal occurs when funds are removed from an account for personal
use.
c. Revenue is the total amount of income generated by the sale of goods or
services related to the company’s primary operations.
d. Expenses is the cost of operations that a company incurs to generate
revenue.

11. To maintain this equation, transactions affecting financial position accounts may have the following
effects:
 Increase in Assets = Increase in Owner’s Equity
Example: Calma started his new business by depositing Php 350,000.00 in a bank account in the
name of Calma Graphics Design at Masa Bank.
 Increase in Assets = Increase in Liabilities
Example: Calma acquired computer equipment by issuing a Php 40,000.00 note payable to
Microsoft Office Systems. The note is due in six months.
 Increase in one Asset = Decrease in another Asset
Example: Calma paid Php 10,000.00 to El Grande Suites for rent on the office studio for the months
of June, July, and August.
 Decrease in Assets = Decrease in Liabilities
Example: Calma partially paid Php 15,000.00 for the purchase of computer supplies on account.
 Decrease in Assets = Decrease in Owner’s Equity
Example: Calma paid Php 5,000.00 to Bills Express for the semi-monthly utilities.
 Increase in Liabilities = Decrease in Owner’s Equity
Example: Yola Company billed Calma for Php 25,000.00 for the ads. Calma will pay next month.
6

12. Here are the examples where you will see the effects of every transaction to the major accounts.
Assets invested by the owner
July 1 – Sandy Dela Cruz started a catering service on July 1, 2020. She invested Php 800,000.00 cash
and car amounting to Php 200,000.00 which both happened in the month of July.
Assets Liabilities Owner's Equity
Cash
Php 800,000.00
+
Dela Cruz, Capital Php 1,000,000.00
+
Car
Php 200,000.00
+

13. Borrowings from the bank
July 2 – Sandy Dela Cruz borrowed Php 100,000.00 cash from Matagumpay
Bank for her business.
Assets Liabilities Owner's Equity
Cash
Php 100,000.00
+
Loans Payable
Php 100,000.00
+
The asset purchased for cash
July 7 – Sandy bought tables and chairs from Matibay Furnitures and paid
Php 45,000.00 cash.
Assets Liabilities Owner's Equity
Cash
Php 45,000.00 (-)
Furniture
Php 45,000.00
+

14. Assets purchased on account
July 15 – Various equipment were purchased on account from Masigasig
Trucking Services for Php 55,000.00.
Assets Liabilities Owner's Equity
Equipment Php
55,000.00
+
Accounts
Payable
Php 55,000.00
+

15. Cash withdrawal by the owner
July 18 – Sandy Dela Cruz made a withdrawal of Php 5,000 for her personal use.
Payment of liability
July 20 – The account due to Masigasig Trucking Services was paid in cash.
Assets Liabilities Owner's Equity
Cash
Php 5,000.00 (-)
Dela Cruz, Drawings
Php (5,000.00) (-)
Assets Liabilities Owner's Equity
Cash
Php 55,000.00 (-)
Accounts
Payable
Php 55,000.00 (-)

16. The table summarizes the effects of these transactions on the accounting equation:
Date Assets
July Cash Car Furniture Equipment
1 Php 800,000.00 Php 200,000.00
2 Php 100,000.00
7 Php (45,000.00) Php 45,000.00
15 Php 55,000.00
18 Php (5,000.00)
20 Php (55,000)
Balances Php 795,000.00 Php 200,000.00 Php 45,000.00 Php 55,000.00
Total
Balance
Php 1,095,000.00

17. Date Liabilities Owner’s Equity
July Payable Loans Accounts
Payable
Dela Cruz Capital Other Account Title
1 Php 1,000,000.00
2 Php 100,000.00
7
15 Php 55,000.00
18 (Php5,000.00) Dela Cruz Drawings
20 (Php 55,000.00)
Balances Php 100,000.00 Php 0.00 Php 995,000.00
Total Balance Php 1,095,000.00

18. Received cash for revenue earned
July 21 – Sandy Dela Cruz’s catering service was hired and Php 15,000.00 cash
was received from the customers.
Paid cash for expenses incurred
July 22 – Gas and oil worth Php 500.00, and car repairs worth Php 1,000.00 were paid in a cash
transaction.
Assets Liabilities Owner's Equity
Cash
Php 15,000.00
+
Service Revenue
Php 15,000.00
+
Assets Liabilities Owner's Equity
Cash
Php (1,500.00) (-)
Gas & Oil
Php (500.00) Repair
Exp.
Php (1,000.00) (-)

19. Revenue rendered on account
July 24 – Dela Cruz’s catering service was hired again by a customer but this time, the customer was
not able to pay Dela Cruz on that day. Instead, she made a promise to pay Php 16,000.00 on July 31
and August 15.
Paid for expenses incurred
July 25 – Dela Cruz paid Php 500.00 for the telephone bill.
Assets Liabilities Owner's Equity
Accounts
Receivable
Php 16,000.00
+
Service Revenue
Php 16,000.00
+
Assets Liabilities Owner's
Equity
Cash
Php
(500.00)
(-)
Telephone
expense
Php
(500.00)
(-)

20. Revenue earned with a down payment, balance on the account
July 27 – Another customer hired the catering service of Dela Cruz and received a bill amounting to Php
20,000.00 and 50% of it was collected.
Customer’s account collected in cash
July 30 – The customer on July 24 paid 50% of his account in cash.
Assets Liabilities Owner's Equity
Cash
Php 10,000.00
+
Service Revenue
Php 20,000.00
+
Accounts
Receivable
Php 10,000.00
+
Assets Liabilities Owner's Equity
Cash
Php 8,000.00
+
Accounts
Receivable Php
(8,000.00)
(-)

21. Paid cash for expenses incurred
July 31 – Sandy Dela Cruz paid Php 10,000.00 for rental of office space, and
salaries of Php 9,000.00.
Assets Liabilities Owner's Equity
Cash
Php
(19,000.00)
(-)
Salaries Expense
Php (9,000.00)
(-)
Rent Expense Php
(10,000.00)
(-)

22. The table summarizes the effects of these transactions on the accounting equation, (increase or
decrease in each account).
Sandy Dela Cruz’s Catering Service
Financial Transaction Worksheet
Month of July, 2020
Date Assets ( in Php ) Liabilities ( in Php ) Owner’s Equity
July Cash Car Furnitures Equipment
Accounts
Receivable
Loans Payable Accounts
Payable
Aguinaldo,
Capital
Other
Account
Title
1 P 800,000.00 P 200,000.00 P 1,000,000.00
2 P 100,000.00 P 100,000.00
7 P (45,000.00) P 45,000.00
15 P 55,000.00 P 55,000.00
18 P (5,000.00) P (5,000.00) Dela Cruz,
Drawings
20 P (55,000.00) P (55,000.00)
21 P 15,000.00 P 15,000.00 Service
Revenue
22 P (500.00) P (500.00) Gas and Oil
P (1,000.00) P (1,000.00) Repair
Expense
24 P 16,000.00 P 16,000.00 Service
Revenue
25 P (500.00) P (500.00) Telephone
Expense
27 P 10,000.00 P 10,000.00 P 20,000.00 Service
Revenue
30 P 8,000.00 (8,000.00)
31 P (10,000.00) P (10,000.00) Rent Expense
P (9,000.00) P (9,000.00) Salaries
Expense
Bal. P 807,000.00 P 200,000.00 P 45,000.00 P 55,000.00 P 18,000.00 P 100,000.00 P0.00 P 1,025,000.00
TOTAL BALANCES P 1,125,000.00 P 1,125,000.00

23. Directions: For each transaction, tell whether the assets, liabilities, and equity will increase, decrease, or
have no effect. Write + for increase, (-) for decrease, and NE for no effect. Write your answers on
a separate sheet of paper.
Assets Liabilities Owner's Equity
1. The owner invested cash in the business.
2. The owner withdrew cash for personal use.
3. The company received cash from a bank loan.
4. The company paid the bank loan.
5. The company purchased supplies on a cash basis.
6. The owner contributed her personal computer to
the business.
7. The company purchased equipment on account.
8. The company purchased a piece of land with a down
payment and signed note.
9. The owner bought furniture for the business on account.
10. The company repaid its suppliers.

24. Directions: Compute the amount of the missing element of financial position
(A= L+OE). Write your answers on a separate sheet of paper.
1. Del Mundo Corporation has assets of Php 500,000.00 and an owner’s equity of Php 340,000.00.
2. Hernandez Cooperative has liabilities of Php 400,000.00 and an owner’s equity of Php 320,000.00.
3. Valdez Plumbing Services has assets of Php 234,000.00 and liabilities of Php 100,000.00.
4. Marta’s First Eatery has liabilities of Php 180,000.00 and an owner’s equity of Php 230,300.00.
5. Paway Hub has assets of Php 892,000.00 and liabilities of Php 190,000.00.
6. Golden Corporation has assets of Php 120,000.00 and liabilities of Php 20,000.00.
7. Tessie’s Store has liabilities of Php 8,000.00 and an owner’s equity of Php 12,000.00.
8. De Guzman Merchandise has assets of Php 500,000.00 and an owner’s equity of Php 390,500.00.
9. Marziano Cooperative has liabilities of Php 90,000.00 and an owner’s equity of Php 240,000.00.
10. Pearl Trading Enterprise has assets of Php 800,500.00 and liabilities of Php 450,000.00.

25. Directions: Analyze the transactions of Kim as the owner of Chinita Girl Spa Services. Record the
transactions using a financial transaction worksheet indicated on the next page. Write your
answers on a separate sheet of paper.
14
June 1 Kim invested Php 500,000.00 cash and equipment amounting to Php100,000.00 to
open Chinita Girl Spa.
2 She borrowed Php 50,000.00 cash from Bamba Bank to be used for her business.
7 She bought tables and chairs from Maginhawa Furnitures and paid Php 20,000.00
cash.
15 Various equipment were purchased on account from Beauty Shoppy for Php
50,000.00.
18 She made a withdrawal of Php 10,000.00 for her personal use.
20 The account due to Beauty Shoppy was paid in cash.
21 Chinita Girl Spa Services was hired. The cash of Php 10,000.00 was received from the
customer.
22 Gas and oil worth Php 1,000.00 and equipment repairs worth Php 1,000.00 were paid
in a cash transaction.

26. June 2
4
Service was hired again by a customer for Php 15,000.00 but this time
the customer was only able to pay Kim 50% on that day and she made
a promise to pay the other 50% on June 30.
2
5
She paid Php 1,000.00 for the telephone bill.
2
7
Another customer hired the services of Chinita Girl Spa Services. A bill
was issued to them for Php 30,000.00 and 50% of it was collected.
3
0
The remaining balance on the transaction last June 24 was paid in cash.
3
0
She paid Php 5,000.00 for the office rental space and Php 4,000.00 for
employees’ salaries.

27. 15
Chinita Girl Spa Services
Financial Transaction Worksheet
Month of June, 2020
Date ASSETS LIABILITIES OWNER’S
EQUITY
June Cash Furnitures Equipment Accounts
Receivable
Loans
Payable
Accounts
Payable
Kim,
Capital
Other
Account
Title
1
2
7
15
18
20
21
22
24
25
27
30
30
Bal.
Total
Balances

28. Assessment
Directions: Answer the questions that follow. Write the letter of your answers on a separate sheet of paper.
1. Which is the accounting equation?
A. assets= liabilities + owner’s equity
B. liabilities = assets + owner’s equity
C. owner’s equity = assets + liabilities
D. assets = revenue - expenses
2. What are the resources owned by the owners?
A. expenses
B. liabilities
C. revenues
D. assets
3. Which term refers to the obligations of the business?
A. liabilities
B. assets
C. revenues
D. owner’s equity

29. 4. Which refers to the remaining amount of the assets after paying all the company’s liabilities?
A. revenues
B. owner’s equity
C. expenses
D. net profits
5. What does an extended accounting equation include?
A. revenues and expenses
B. revenues and assets
C. expenses and liabilities
D. none of the above
6. When the owner invested cash on the business, what account/s
increase/s?
A. assets and owner's equity
B. assets only
C. liabilities and assets
D. owner's equity only

30. 7. Is there an effect on the assets account when the owner withdraws cash for personal use?
A. Yes, it decreases. B. Yes, it increases.
C. Yes, it increases and decreases. D. None of the above
8. What would be the effect to the liabilities of the business after availing loan from Panata Bank?
A. It remains the same. B. It decreases.
C. It increases. D. None of the above
9. Mr. Kim has assets of Php1,000,000.00 and liabilities of Php 300,000.00. What is his equity?
A. Php 700,000
B. Php 1,300,000
C. Php 800,000
D. 0
10. The liabilities of Senshin’s Shop are Php 450,000 and his equity is Php 780,000. What is the business'
total assets?
A. Php 1,032,000
B. Php 1,320,000
C. Php 1,023,000
D. Php 1,230,000

31. Additional Activities
Directions: Analyze the transactions of Ronald Cabiling Housekeeping Services during the month of
August 2020. Record the transactions using the financial transaction worksheet. Write your
answers on a separate sheet of paper.
August1 – Mr. Cabiling invested Php 1, 000,000.00 cash for his business.
2 – Various equipment were purchased for the business amounting
to Php 100,000.00
4 – Cabiling Housekeeping Services was hired by a customer and
they received a payment of Php 5, 000.00.
5 – Cabiling paid Php 3,000.00 for the salary of the employees.
7 – Another customer hired the service of Cabiling Housekeeping. A
bill wa s issued to them for P hp 10,000.00 of which 9 0 % wa s
collected.
13 – Cabiling paid Php 2,000.00 for the telephone bill.
21 – Cabiling invested again the amount of Php 50,000 in the
business.
25 – The account on August 7 was finally collected in full.
28 – The De Guzman family hired Cabiling Housekeeping Services to
clean their mansion amounting to P hp 20,000.00. The family
paid the amount of P hp 5,000.00 and the balance will be paid
on August 30.
30 – Cabiling collected the balance from De Guzman family.
18

32. Answer Key
1,080,000 P 1,080,000 P BALANCES TOTAL
1,080,000 P 0 0 100,000 P 980,000 P Bal.
(15,000) 15,000 30
Revenue
Service
20,000
15,000
5,000
2 8
(1,000) 1,000 25
50,000 50,000 21
Expense
Telephone
(2,000) (2,000)
1 3
Revenue
Service
10,000
1,000 P
9,000
7
Expense
Salaries
(3,000) (3,000)
5
Revenue
Service
5,000 5,000
4
100,000 P (100,000) 2
1,000,000 P 1,000,000 P 1
Title
Account
Other
Capital
Cabiling, Receivable
Accounts
Equipment Cash August
EQUITY OWNER’S LIABILITIES ASSETS Date
2020 August, of M onth
Worksheet Transaction Financial
Service Housekeeping Cabiling Ronald
Activities Additional
D 10. A 5.
A 9. B 4.
C 8. A 3.
A 7. D 2.
A 6. A 1.
Assessment
19

33. 683,000 P 683,000 P BALANCES TOTAL
633,000 P 0 50,000 P
15,000 P
150,000
P
20,000 P 498,000 P
Bal.
Expense
Salaries
(4,000) (4,000)
Expense
Rent
(5,000) (5,000)
3 1
(7,500) 7,500 30
Revenue
Service
30,000
15,000
15,000
2 7
Expense
Telephone
(1,000) (1,000) 2 5
Revenue
Service
15,000
7,500 P
7,500
2 4
Expense
Repair
(1,000) (1,000)
Oil
and Gas
(1,000) (1,000)
2 2
Revenue
Service
10,000 10,000 2 1
(50,000) (50,000) 20
Drawings
Kim,
(10,000) (10,000)
1 8
50,000 P 50,000 P 15
20,000 P (20,000) 7
50,000 P 50,000 2
600,000 P 100,000 P 500,000 P 1
Title
Account
Other
Capital
Kim,
Payable
ts
Accoun
Payable
Loans Receivable
Accounts
Equipment Furnitures Cash June
EQUITY
OWNER’S
LIABILITIES ASSETS Date
2020 June, of Month
Worksheet Transaction Financial
Services Spa Girl Chinita
Do I Can What
350,500 hpP OE= 10. 702,000 hpP = OE 5.
330,000 hpP A= 9. 410,300 hpP = A 4.
109,500 hpP L= 8. 134,000 hpP OE= 3.
20,000 hpP A= 7. 720,000 hpP A= 2.
100,000 hpP = OE .6 160,000 hpP L= 1.
Learned Have I What
20

34. NE - - suppliers. its repaid company The 10.
NE + +
account. on business
the for furniture bought owner The 9.
NE + - +
note.
signed and payment down a with land
of piece a purchased company The 8.
NE + +
account. on
equipment purchased company The 7.
+ NE +
business. the to computer
personal her contributed owner The 6.
NE NE + -
basis. cash a
on supplies purchased company The 5.
NE - - loan. bank the paid company The 4.
NE + +
loan. bank
a from cash received company The 3.
- NE -
use. personal
for cash withdrew owner The 2.
+ NE +
business.
the in cash invested owner The 1.
EQUITY
OWNER'S LIABILITIES ASSETS
More What’s
1,896 10.
912,556 9.
562,879 8.
987,217 7.
389,000 6.
790,000 5.
150,000 4.
100,000 3.
30,000 2.
150,000 1.
EQUITY OWNER'S LIABILITIES ASSETS
) Php (In
New21What’s

35. vary may Answer Yes, 2.
Principle Entity Business 1.
In What’s
True 10. True 9. True 8. True 7. False 6.
True 5. False 4. True 3. True 2. True 1.
Know I What
22

36. References
Anastacio, Ma. Flordeliza. 2011. Fundamentals Of Financial Management (With Industry Based
Perspective). Manila: Rex Book Store.
Gilbertson, Claudia. 2010. Fundamentals Of Accounting. 8th ed. Australia: Cengage Learning.
Padillo, Nicanor Jr. 2011. Financial Statements Preparation, Analysis And Interpretation. Manila: GIC
Enterprises.
Pefianco,Erlinda C. 1996. The Accounting Process:PrinciplesAnd Problems.Makati: GoodWillTrading.
Young, Felina C. 2008. Principles Of Marketing. Manila: Rex BookStore.
Teaching Guide For Senior High School, Fundamentals Of Accountancy, Business And Management 1..
2016. Quezon City: Commission on Higher Education.
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