Senior High School

11
Fundamentals of
Accountancy, Business and
Management 1
Quarter 3 - Module 7:
The Accounting Equation
Fundamentals of Accountancy, Business and Management 1 – Grade 11
Quarter 3 – Module 7: The Accounting Equation

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Schools Division Superintendent : Loida N. Nidea

Assistant Schools Division Superintendent : Lauro B. Millano

Development Team of the Module

Writer : Maria Theresa O. Betito
Editor: Rachelle C. Laureta
Reviewers: Sarah Christine P. Godoy
Raquel C. Borondia
Sireon C. Tapales
Illustrator: Maria Theresa O. Betito
Cover Art: Jed Adra
Layout Artist: Jhomar B. Jaravata

Address: Freedom Sports Complex, San Jose, Pili, Camarines Sur

Email: [email protected]
Website: www.depedcamsur.com
Telephone No: (telefax) 8713340
 INTRODUCTION

There are a few basic building blocks that form the foundation of accounting.
One of those is the accounting equation.

If you are a business owner, how would you know how profitable your business
is? Which part of what the business owns belongs to you? How would you know that
the total of what the business owns at any point in time will equal the amount of what it
owes the creditor and the own er?

This module explains the concept of the accounting equation and how every
business transaction affects the accounting equation.

OBJECTIVES

At the end of this module, you should be able to:

✓ Illustrat e the accounting equation. (ABM_FABM 11 -IIIb-c-17)

✓ Perform operations involving simple cases with the use of
accounting equation. (ABM_FABM 11 -IIIb-c-18 )

AC B VOCABULARY LIST

The following are key words that you should be familiar with to help you better
understan d the accountin g equation .

▪ Assets are resources owned by the business .

▪ Balance Sheet is a financial statement that reports the company‘s total

assets, liabilities, and owner‘s equity at a particular po int in time. Also known
as the ―Statement of Financial Position‖.

▪ Bu siness transaction is an activity or event that causes a measurable

change in the accounting equation.

▪ Credit is an accounting entry that either increases a liability or equity account,

or decreases an asset or expense account. It is positioned to the rig ht in an
accounting entry.

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▪ Debit is an accounting entry that either increases an asset or expense
account, or decreases a liability or equity account. It is positioned to the left in
an accounting entry.

▪ Double -entry accounting is a system where every tr ansaction affects both

sides of the accounting equation.

▪ Economic Benefit is any benefit that we can quantify in terms of the money
that it generates.

▪ Expense refers to costs that decrease assets and/or increase liabilities

leading to decrease in equity resulting from the operations of the business
and not because of distributions to owners.

▪ Income /Revenue refers to earnings that increases assets and/or decreases

liabilities leading to increase in equity resulting from the operations of the
business and not from the owner‘s contribution.

▪ Income Statement is a financial statement that reports the results of the

company‘s operations for a specific period of time which is called ―net
income‖ if the result is positive while ―net loss‖ if the result is negati ve. Also
known as the‖ Statement of Comprehensive Income‖.

▪ Liabilities are claims of the creditors, financial obligations or debts of the

business.

▪ Owner’s Equity are claims of the owner on the assets of the business. (the
difference between assets and liabilities). Comment [G1]: Vocabulary list are not
arranged according to related terms.

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 DOUBLE-ENTRY ACCOUNTING SYSTEM
As to other language, the accounting system has its own. In accounting, in
order for you to record a transaction you have to use the double -entry system . What
does it mean? How does it work?

Double -entry accounting is a system where every transaction affects both

sides of the acc ounting equation. Also, a ccountants use a visual tool called ―T-
account ‖ due to its shape. The account ha s two sides, the left side called ―Debit‖ and
.
the right side called ―Credit‖

Account
Debit Credit

Debits and credits are words used to reflect the duality or double -sided nature
of all financial transactions. ― Debits” represent the flow of economic benefit to a
destination (value received ) while “Credits‖ represent the flow of economic benefit
from a source (value parted with) . Destination that economic benefit can flo w to
include s Assets (e.g. cash, c ar, appliances) . On the other hand, sources that
economic benefit can flow from include Liabilities and Owner‘s Equity.

Illustration 7.1

Yesterday you b orrowed P100 from your friend Linda. How does this
transaction would loo k like in the accounting world?

The ―destination ‖ of the econ omic benef it ( P100) is to our cash , so we d ebit
the amount in the Cash account. W hile the ―source‖ of the economic benefit ( P100) is
from our debt to Linda so we credit the amount in the Debt to Linda ac count.

CASH DEBT TO LINDA

Debit Credit Debit Credit
P100 P100

Destination Source

Economic Benefit

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 The P100 will be debited on the cash (increase in cash), an A sset. T he other
side will be credited on the debt (increase in debt ), a Liability . Therefore, a one -step
transaction in the real world becomes a double entry in the accounting worl d.

How about if you pay Linda? How will this work in the accounting world ?

Illustration 7.2:

You paid Linda the P100 you borrowed yesterday .

The ―destination‖ of the economic benefit ( P100) is to our Debt to Linda

account, so we Debit Debt to Linda account. While the ― source‖ of the economic
benefit (P100) is from our cash, so we credit the amount in the Cash account.

CASH DEBT TO LINDA

Debit Credit Debit Credit

P100 P100

Source Destination

Economic Benefit

P100 will be credited on the cash (decrease in cash), the other side will be
credited (decrease in debt). Again, a one -step transaction in the real world becomes
a double entry in the accounting world.

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NORMAL BALANCES
As previously mentioned, destination that economic benefit can flow to include
Assets such as cash, car and building. On the other hand, sources that economic benefit
can flow from include Liabilities and Owner‘s Equity (Image 7.1).

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 Account Debit Credit Normal
Balance
ASSETS Increase Decrease Debit
LIABILITIES Decrease Increase Credit
OWNER'S EQUITY Decrease Increase Credit
Table 7.1 Normal Balance of Accounts

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 Sample Illustration

Doris wants to put up a burger stand using her personal

savings amounting to P10,000. Unfortunately, her money is not
enough to open the business. She borrows P5,000 from her cousin
Angie. She now has P15,000 ready for the business.
(Transaction No. 1 & 2)

How will these transactions look like using the t -account and normal
balances ?

Transaction 1: Record P10,000 Initial investment of Doris.

Doris puts her P10,000 cash in the business. Cash is an asset. In the
transaction, there is an increase i n cash, hence an increase in asset. So, you debit
the amount of P10,000 in the “CASH” account. On the other hand, the P10,000 is
the initial investment of Doris . Initial investment is part of the owner‘s e quity. In the
trans action, there is an increase in investment, hence an increase in the owner‘s
equity. So, we credit he amount of P10,000 in the “INITIAL INVESTMENT” account.

CASH INITIAL INVESTMENT

Debit Credit Debit Cred it
P10,000 P10,000

Transaction 2: Record the P5,000 debt of Doris to Angie.

Doris receives the borrowed P5,00 0 cash from Angie. Again , in this
transaction , there is an increase in asset (cash). So, you debit P5,000 in the “CASH”
account. On the other hand, the P5,000 is Doris‘ debt to Angie. A debt is a liability. In
the transaction, there is an increase in debt, hence an increase in liability . So, you
credit the amoun t of P5,000 in the “DEBT TO ANGIE” account .

CASH DEBT TO ANGIE INITIAL INVESTMENT

Debit Cred it Debit Cred it Debit Cred it
P10,000 P5,000 P10,000
P5,000

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 To determine the balance s of Cash, debt to Angie and Initial investment, refer
to the t -account below.

CASH DEBT TO ANGIE INITIAL INVESTMENT

Debit Cred it Debit Cred it Debit Cred it
P10,000 P5,000 P5,000 P5,000 P1,000 P10,000
P5,000 P1,000

P15,000 P6,000 P5,000 P5,000 P1,000 P10,000

P9,000 P0 P9,000

An account‘s balance is the difference between the total debits and total
credits of the account. When total debits are greater than total c redits, the account
has a debit balance, and when total credits exceed total debits, the account has a
credit balance.

THE ACCOUNTING EQUATION

The three components of the basic accoun ting equation are Assets, Liabilities
and Owner‘s Equity.

The account ing equation is expressed as:

Assets = Liabilities + Owner’s Equity Equation 7. 1

It can also be structured as:

Liabilities = Assets – Owner Equity Equation 7.2

or

Equation7.3
Owner Equity = Assets – Liabilities

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 What if only the amounts of Assets and Owner‘s Equity were stated ? How
much is the Liabiliti es?

Equation 7.2

Illustrative Example 7.3:

Your weekly allowance as a student is P500 and it is given to you by your

parents every Monday. Last week, you borrowed money from your classmate Jane
for your group project which you have to pay this week (Monday). The remaining
amount of your allowance after paying Jane is P450. How much was your debt to
Jane?

Given:
Cash ( Assets) = P500
Debt (Liabilities) = ?
Allowance for the week ( Owner‘s Equity ) = P450

Illustration:

P450
?
P500 OWNER’S
LIABILITIES EQUITY

ASSETS

Not In Balance

Solution:
LIABILITIES = ASSETS – OWNER’S EQUITY
? = P500 – P450
? = P50
P50 = P50

*If L iabilities is equal to P50, then, it foll ows that the comb ined amounts of
Liabilities ( P50) and Owner‟s Equity ( P450 ) is equal to t he amount of A ssets
(P500 ).

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 What if only the amounts of Liabilities and Owner‘s Equ ity were stated ? How
much is the amount of A ssets?

Equation 7.1

Illustrative Example:

Your weekly allowance is given to you by your parents every Monday . Last
week, you borrowed P50 from your classmate Jane for your group project which you
have to pay this week (Monday). The remaining amount of your allowance after
paying Jane is P450. How mu ch is your weekly all owance?

Given:
Cash ( Assets) = ?
Debt (Liabilities ) = P50
Allowance for the week ( Owner‘s Equity ) = P450

Illustration:

?
P50
ASSETS
P450

LIABILITIES
OWNER’S
Not In Balance EQUITY

Solution:

ASSETS = LIABILITIES + OWNER’S EQUITY

? = P50 + P450
? = P500
P500 = P500

*If Assets is equal to P500 , then, it follows that the combined amo unts of
liabilities (P50) and Owner‟s Equity (P450) is equal to the amount of assets (P500 ).

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 Now that you are already familiar with the accounting equation, you may
observe the effects of business transact ions in the accounting equation by performing
mathematical operations in the ‗Siomai ‘ business of Suzy Aragon .

Accounting equation starting balance

With your school‟s per mission, Suzy Aragon started a „Siomai‟ food cart
business located at your school canteen on August 1, 2019. As an ABM student,
Suzy asked for your he lp to analyse each transaction using the accounting
equation. The following transactions occurred during the month of August.

Illustration:

P0 P0 P0

ASSETS LIABILITIES OWNER’S

EQUITY

In Balance

ASSETS = LIABILI
TIES + OWNER’S EQUITY

= +

Total P0 = Total Liabilities and P0

Assets Owner’s Equity

As of now, the balance of the accounting equation is zero since there is no

transaction yet. Let‘ s see what happens to the equation when business transaction s
begin to occur.

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 DATE ASSET LIABILITIES OWNER'S EQUITY

Debt Debt Aragon, ,

Food Aragon
2019 Cash Steamer Stove Ingredients to to Withdrawals
Cart Capital
Amy Lita
August 1 P10,000 P18,000 P2,000 P30,000
August 3 1,500 P1,500

August 8 (1,500) P1,500

August 12 P5,000 P5,000

August 15 (1,000) (P1,000)

August 18 (5,000) (5,000)

Balances P4,000 P18,000 P2,000 P1,500 P5,000 P1,500 P0 (P1,000) P30,000

P30,500 P30,500

Table 7.2

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Practice Task 3 :
Instructions : Determine the balances of Assets, Liabilities and Owner's Equity after
taking into consideration each of the following transactions.

March 1 – Abe started a small tailoring and repair shop near a school with an initial
investment of P50,000 cash.

March 4 – Abe bought 1 unit of e lectric fan at P2,000 cash to be used in the shop.
March 9 – Abe purchased P10,000 worth of 1 unit sewing machine from Sam on
account.
March 15 – Abe received cash payment on repairs rendered for clothes worth P1,000
to a customer.
March 21 – Abe gave Sam P2,500 as partial payment for the purchased sewing
machine on account .
March 26 – Abe withdrew P1,000 cash from the business for personal use.

March 31 – Paid expenses (electricity, water and rent ) for the month worth P1,500.

Using the concepts of t-accounts, normal balances and the accounting

equation. How much is the final balance of the following major accounts:

1. Assets: P_____________________

2. Liabilities: P___________________

3. Owner‟s Equity: P___________ ____

 ASSIGNMENT

Instruction: Choose one from the two options which is more suitable for you.

Rubrics is provided below to guide you in doing your task.

Option 1:

Visit your school canteen or any store/business in your community that is

nearest or most accessible to you. Ask the person in charge or owner about how
much is the total amount of their a ssets as well as the total amount of their
liabilities. Make a list of their Assets and Liabilities. Comp ute for the owner‘s
equity using the accounting equation. Write your outpu t in a sheet of paper
signed by the person you have interviewed.
Note: Write a letter of request signed by your teache r and approved by your
Senior High School Coordinator &/or School Principal. Then, present
it to the person in charge of the canteen or own er of the
store /business that you have chosen before conducting the interview.
If possible, t ake photos (stolen shots ) to document your activity.

Option 2:

Look around your house and write down assets that you can identify .
Interview your pare nts. Ask them of how much they think are the costs of the
assets that you have listed . Also, ask your parents how much is the amount of
the liabilities that your family has. Compute for the owner‘s equity using the
accounting equation . Write your output in a sheet of paper signed by your
parents.

Note: If possible, take photos (stolen shots) to document your activity.

 RUBRICS:
Criteria Mastered Exceeded Attained Approaching Unattained
(10) (8) (5) Attainment (1)
(3)
Accounting Student Student presents a clear understanding on the concept of accounts. Student Student Student
concept of presents a Identification of assets, liabilities and owners’ equity is 80 percent meets the knowledge on knowledge on
accounts. clear, specific correct. expectations the concept the concept of
understanding on the of account is account is not
on the concept concept of understood shown. Steps
of accounts. accounts, but in a very and process of
There is a
BUT, least listing and
skillful listing
identification minimum identification
and
of assets, level of of assets
identification of
liabilities and competency. liabilities and
assets, liabilities
owners’ Identification owners’
and owners’
equity is only of assets, equity is not
equity and it is
50 percent liabilities and followed.
100 percent
correct. owners’
correct.
equity is 30
percent
correct.
Accounting Accounting Completion of Completion Accounting
equation equation is accounting of accounting equation is
correctly equation per equation per not presented
balance identified identified per listed
and assets assets assets
presented liabilities and liabilities and liabilities and
clearly. owners’ owners’ owners’
equity is 50 equity is 30 equity.
percent percent
Completion of correct. correct.
accounting
equation per
identified assets
liabilities and
owners’ equity
is 80 percent
correct.
Organization/ Task is Task is clearly organized and all questions and requirements are Task is Task is not Task is very
Structure extremely well answered and provided but there are few errors organized but organized. poorly
organized and NOT all Questions organized and
all questions questions and and fall well
and requirements requirements behind the
requirements are answered are NOT all standards.
are answered and provided. answered and Parts are
and provided There are provided. missing and
accurately. errors on the Most number does not
answers and of errors are meet the
requirements. committed. requirements.
Completeness Task is Task is 80% complete Task is 50% Task is 30% Task is 10%
complete. complete complete complete