San Jose Community College

San Jose, Malilipot, Albay

First Semester – S.Y. 2022-2023

Module 3:
Financial Analysis and Reporting

Eva M. Bo, LPT, MBA

Instructor

THE ACCOUNTING EQUATION

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Objective: Illustrate the accounting equation.
LEARNING ACTIVITY

Illustration of the effects of the transaction in the accounting elements.

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 P 800,000 cash and Cars amounting to P 200,000

___________________________________________________________________________________
ASSETS = LIABILITIES + OWNER’S EQUITY
Cash P 800,000 Reyes, Capital P 1,000,000
Cars 200,000

Borrowings from the bank

July 2 – Reyes borrowed P 100,000 cash from PNB for use in his business.
_________________________________________________________________________________
ASSETS = LIABILITIES + OWNER’S EQUITY
Cash P 900,000 Loans Payable P 100,000 Reyes, Capital P 1,000,000
Cars 200,000

Asset purchased for cash

July 7 – Bought tables and chairs from Orocan and paid P 45,000 cash.

___________________________________________________________________________________
_
ASSETS = LIABILITIES + OWNER’S EQUITY
Cash P 855,000 Loans Payable P 100,000 Reyes, Capital P 1,000,000
Cars 200,000
Furnitures 45,000

Assets purchased on account

July 15 – Various equipment were purchased on account from Fortune for P 55,000.

___________________________________________________________________________________
_
ASSETS = LIABILITIES + OWNER’S EQUITY
Cash P 855,000 Loans Payable P 100,000 Reyes, Capital P 1,000,000
Cars 200,000 Accounts Payable 55,000
Furnitures 45,000
Equipment 55,000

Cash withdrawal by the owner

July 18 – Reyes made a cash withdrawal of P 5,000 for personal use.

___________________________________________________________________________________
ASSETS = LIABILITIES + OWNER’S EQUITY
Cash P 850,000 Loans Payable P 100,000 Reyes, Capital P 1,000,000
Cars 200,000 Accounts Payable 55,000 Reyes, Drawings
(5,000)
Furnitures 45,000

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 Equipment 55,000
Payment of liability
July 20 – The account due to Fortune was paid in cash
___________________________________________________________________________________
ASSETS = LIABILITIES + OWNER’S EQUITY
Cash P 795,000 Loans Payable P 100,000 Reyes, Capital P 1,000,000
Cars 200,000 Reyes, Drawings (5,000)
Furnitures 45,000
Equipment 55,000

The following table summarizes the effects of these transactions on the accounting equation
Date Assets Liabilities Owner’s Equity
July Cash Cars Furnitures Equipmen Loans Accounts Reyes, Reyes,
t Payable Payable Drawings Capital
1 800,000 200,000 1,000,000
2 100,000 100,000
Balances 900,000 200,000 100,000 1,000,000
7 (45,000) 45,000
Balances 855,000 200,000 45,000 100,000 1,000,000
15 55,000 55,000
Balances 855,000 200,000 45,000 55,000 100,000 55,000 1,000,000
18 (5,000) (5,000)
Balances 850,000 200,000 45,000 55,000 100,000 55,000 (5,000) 1,000,000
20 (55,000) (55,000)
Balances 795,000 200,000 45,000 55,000 100,000 0 (5,000) 1,000,000
1,095,000 1,095,000

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.

Received cash for revenue earned

July 21 – A customer hired the services of Reyes. Cash of P 15,000 was received from the customers.
___________________________________________________________________________________
__
ASSETS = LIABILITIES + OWNER’S EQUITY
Cash P 15,000 Service Revenue P 15,000

Paid cash for expenses incurred

July 22 – Cash was paid for the following : gas and oil, P 500 and car repairs, P 1,000
___________________________________________________________________________________
__
ASSETS = LIABILITIES + OWNER’S EQUITY
Cash (P 1,500) Gas and Oil (P 500)
Repair Expense (1,000)
Revenue rendered on account
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July 24 – Another customer hired the services of Reyes and promised to pay PHP16,000 on July 31.

ASSETS = LIABILITIES + OWNER’S EQUITY

Accounts
Receivable P 16,000 Service Revenue P 16,000

Paid for expenses incurred

July 25 – Paid PHP500 for telephone bill.
___________________________________________________________________________________
__
ASSETS = LIABILITIES + OWNER’S EQUITY
Cash (P 500) Telephone Expense (P
500)

Revenue earned with a down payment, balance on account

July 27 – Another customer hired the services of Reyes. A bill was issued to them for PHP20,000, 50%
of which was collected
___________________________________________________________________________________
__
ASSETS = LIABILITIES + OWNER’S EQUITY
Cash P 10,000 Service Revenue P
20,000
Accounts
Receivable 10,000

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 P 8,000
Accounts
Receivable (8,000)

Paid cash for expenses incurred

July 31 – Paid PHP10,000 for rental of office space, and salaries of P 9,000.
___________________________________________________________________________________
__
ASSETS = LIABILITIES + OWNER’S EQUITY
Cash (P 19,000) Rent Expense P 10,000
Salaries Expense 9,000
Practice Exercise
A. For each of these transactions we could simply have a “yes” and “no” button.
1. You invest P 1,000 of your personal savings into the business.

Change in owner’s equity?  Yes No

2. Your new oven breaks. You hire a repairman P 50 to fix it.

Change in owner’s equity?  Yes No

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 3. You purchase a computer for the business using the business bank account.

Change in owner’s equity?  Yes No

Answer:
1. Yes
2. Yes
3. Yes

B. Show that the accounting equation is satisfied after taking into consideration each of the
following transactions in the books of Mr. N
1. Started business with capital 1,000,000
2. Bought furniture 25,000
3. Bought goods for cash 20,000
4. Bought goods from Ram on Credit 5,000
5. Sold goods for cash for 15,000
6. Sold goods to Shyam on credit 8,000
7. Paid cash to Ram 4,000
8. Received cash from Shyam 5,000
9. Paid Cash into Bank 25,000
10. Withdrawn from bank 10,000

Answer:

Started business with capital 1,000,000

___________________________________________________________________________________
ASSETS = LIABILITIES + OWNER’S EQUITY

Cash 1,000,000 Capital 1,000,000

Bought furniture 25,000

___________________________________________________________________________________
ASSETS = LIABILITIES + OWNER’S EQUITY

Cash 975,000 Capital 1,000,000

Furnitures 25,000

Bought goods for cash 20,000

___________________________________________________________________________________
ASSETS = LIABILITIES + OWNER’S EQUITY

Cash 955,000 Capital 1,000,000

Furnitures 25,000
Purchases 20,000

Bought goods from Ram on Credit 5,000

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___________________________________________________________________________________
ASSETS = LIABILITIES + OWNER’S EQUITY

Cash 955,000 Accounts Payable 5,000 Capital 1,000,000

Furnitures 25,000
Purchases 25,000

Sold goods for cash for 15,000

___________________________________________________________________________________
ASSETS = LIABILITIES + OWNER’S EQUITY

Cash 970,000 Accounts Payable 5,000 Capital 1,000,000

Furnitures 25,000
Purchases 25,000
Sales (15,000)

Sold goods to Shyam on credit 8,000

___________________________________________________________________________________
ASSETS = LIABILITIES + OWNER’S EQUITY

Cash 970,000 Accounts Payable 5,000 Capital 1,000,000

Furnitures 25,000
Purchases 25,000
Sales (23,000)
Accounts
Receivable 8,000

Paid cash to Ram 4,000

___________________________________________________________________________________
ASSETS = LIABILITIES + OWNER’S EQUITY

Cash 966,000 Accounts Payable 1,000 Capital 1,000,000

Furnitures 25,000
Purchases 25,000
Sales (23,000)
Accounts
Receivable 8,000

Received cash from Shyam 5,000

___________________________________________________________________________________
ASSETS = LIABILITIES + OWNER’S EQUITY

Cash 971,000 Accounts Payable 1,000 Capital 1,000,000

Furnitures 25,000
Purchases 25,000

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Sales (23,000)
Accounts
Receivable 3,000

Paid Cash into Bank 25,000

___________________________________________________________________________________
ASSETS = LIABILITIES + OWNER’S EQUITY

Cash 946,000 Accounts Payable 1,000 Capital 1,000,000

Furnitures 25,000
Purchases 25,000
Sales (23,000)
Accounts
Receivable 3,000
Savings
Account 25,000

Withdrawn from bank 10,000

___________________________________________________________________________________
ASSETS = LIABILITIES + OWNER’S EQUITY

Cash 936,000 Accounts Payable 1,000 Capital 1,000,000

Furnitures 25,000 Drawings (10,000)
Purchases 25,000
Sales (23,000)
Accounts
Receivable 3,000
Savings
Account 25,000

Date Assets Liabilities Owner’s Equity

July Cash Cars Furnitures Equipment Loans Accounts Reyes, Reyes,
Payable Payable Drawings Capital
1
2
Balances
7
Balances
15
Balances
18
Balances
20
Balances

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Evaluation
Instruction: For each transaction, tell whether the assets, liabilities and equity will increase,
decrease or is not affected by stating the given amounts on said elements following the accounting
equation.
A = L + E

1. The owner invests P 100,000 personal cash in the business. + +

2. The owner withdraws P 5,000 business assets for personal use. - -
3. The company receives P 500,000 cash from a bank loan. + +
4. The company repays the bank P 150,000 that had lent money. - -
5. The company purchases equipment P 15,000 with its cash. +/-
6. The owner contributes her personal truck P 90,000 to the business. + +
7. The company purchases supplies P 7,000 on credit. + +
8. The company purchases land P 200,000 by paying half in cash and
signing a note. +/- -
9. The owner withdraws P 4,000 cash for personal use. - -
10. The company repays the suppliers P 5,000. - -

OPERATIONS INVOLVING SIMPLE CASES WITH THE USE OF

ACCOUNTING EQUATION
Objective: Perform operations involving simple cases with the use of accounting equation

Learning Activity

Accounting equation is simply an expression of the relationship among assets, liabilities and owner’s
equity in a business. The general form of this equation is given below:

Assets = Liabilities + Owner’s Equity

Every transaction impacts accounting equation in terms of dollar amounts but the equation as a whole
always remains in balance. Any increase in one side is balanced either by a corresponding decrease in
the same side or by a corresponding increase in the other side and any decrease is balanced either by a
corresponding increase in the same side or by a corresponding decrease in the other side. For better
explanation, consider the impact of twelve transactions included in the following example:

Example 
1. Mr. John invested a capital of P150,000 into his business.

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The investment of capital by John creates very initial accounting equation of the business.  At this point,
the cash is the only asset of business and owner has the sole claim to this asset. Therefore, the
equation would look like

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash = - + Capital
P 150,000 = - + P 150,000

Practice Exercise

A. Summarize the effects of these transactions on the accounting equation by using a table.

1. The owner invested cash of P150,000.

2. Purchased equipment at P 20,000 for cash.
3. The owner withdrew cash of P 112,500.
4. The company purchased supplies on account, P 5,000.
5. The business incurred P15,000 expenses and paid in cash.
6. Paid liabilities worth P 53,000.
7. The business used supplies worth P 8,000.

Below are the beginning balances:

Cash P 60,000
Supplies 7,500
Equipment 300,000
Liabilities 75,000
Owner’s Equity 292,500

Answer:

Beginning Balance:

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash = +
P 160,000 = P75,000 + P 292,500
Supplies =
P 7,500 =
Equipment =
P 300,000 =

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash = - + Capital
P 150,000 = - + P 150,000

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash = - + Capital
(P 20,000) = - +
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 Equipment = - +
P 20,000 = - +

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash = - + Drawing
(P 112,500) = - + (P 112,500)

ASSETS = LIABILITIES + OWNER’S EQUITY

Supplies = Accounts Payable +
P 5,000 = P 5,000 +

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash = - +
(P 15,000) = - +
Incurred Expense = - +
P 15,000 = - +

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash = Accounts Payable +
(P 53,000) = (P 53,000) +

ASSETS = LIABILITIES + OWNER’S EQUITY

Supplies = - + Capital
(P 8,000) = - + (P 8,000)

Evaluation

Mr. Roger Ang started a fitness gym business to be known as “Roger’s Gym”. He performed
following
transactions during the first month of operations:

1. Mr. Roger Ang invested a capital of P500,000 into his business.

2. Acquired a building for 300,000 cash for business use.
3. Bought furniture for P 11,500 cash for business use.
4. Purchased equipments from a manufacturer for P 30,000 on credit.
5. Collected membership fees for P 5,000 cash.
6. Paid P 3,000 cash to his payables.
7. Mr. John paid P 1,500 cash for telephone bill.

Required: Explain how each of the above transactions impacts the accounting equation of John T-
shirts. Use a table.

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