4

ACCOUNTING EQUATION
for Fundamentals of Accountancy,
Business and Management 1
Senior High School (ABM)
Quarter 1 / Week 3
 FOREWORD

This Self Learning Kit will serve as a guide in discussing the

accounting equation and its complexities. It will be your aid as you
learn new ideas and enrich your existing knowledge about
mathematical and business concepts.

What happened?

This part contains review of prior knowledge that has a great

contribution to the focused topic of this module. This also contains
preliminary activities that will awaken the prior knowledge of the
learners and will motivate them to learn.

What I Need To Know? (Discussion)

This section discusses the accounting equation, its components

and its analysis.

What I have Learned? (Evaluation/Post Test)

The exercises found in this section are guaranteed to develop

accounting skills, analyses, and to check the understanding of the
learners about the topic in this module.
 LESSON 1 Varied accounting concepts &
principles
LEARNING COMPETENCIES:
Illustrate the accounting equation. (ABM_FABM11-111b-c-17)
Perform operations involving simple cases with the use of accounting equation.
(ABM_FABM11-111b-c-18)

OBJECTIVES:
K: Define terms related to accounting equation;
S: Solve problems using the accounting equation; and
A: Show appreciation in solving problems using the
accounting equation.

I. What Happened
Accounting equation is the relation between the assets, liabilities and equity of a
business. It states that at any point of time, the value of assets of a business is equal to sum of
the value of its liabilities and its shareholders' equity.

Assets = Liabilities + Shareholders' Equity

It is the most basic principle of financial accounting and it underlies the double entry
accounting.
PRE-TEST:
The new topic is about Accounting Equation. When you come across with this term EQUATION,
what comes into your mind? So, before we begin with the new one let us check if you have prior
knowledge on this topic by answering the following simple cases that will surely exist in
business.

Instructions: Write TRUE if the illustration is correct and FALSE if incorrect on each of the
activity of Ms. Diaz.

1. Ms. Diaz invested P50,000.00 to start a photocopying business.

Asset = Liability + Owner’s Equity
Cash – P 50,000 = 0 + Diaz, Capital – P
50,000

2. Purchased a photocopying machine on account, P80,000.00 .

Asset = Liability + Owner’s Equity
Photocopying = Accounts +
Machine – P 80,000 Payable – 80,000 0

3. Received P10,000.00 as payment for reproduction of test papers.

Asset = Liability + Owner’s Equity
Cash – P 10,000 = 0 + Revenue –
P 10,000

4. Purchased photocopying supplies for P5,000.00

Asset = Liability + Owner’s Equity
Cash – (P5,000) = 0 +
0
Supplies – P 5,000

5. Paid electrical bill for P 1000.00.

Asset = Liability + Owner’s Equity
Cash – (P1,000) = Expense – P1,000 + 0
I. What You Need to Know

PARTS of the ACCOUNTING EQUATION:

• Assets. These are the resources owned by the business that will provide future

benefits. (College 1 Accounting Book, 2007) Examples: cash, accounts receivable,

supplies, equipment, vehicles, office furniture, land, and building

. • Liabilities. These are the rights of the creditors that represent the debt of the business.

(College 1 Accounting Book, 2007) Examples: accounts payable, notes payable, loans

payable, and interest payable.

• Owner’s Equity. This refers the rights of the owners in the business. This is the amount by

which the business assets exceed business liabilities. (College 1 Accounting Book, 2007)

Example: if the photocopying equipment is valued at P 80,000 and the loan amount due is P

30,000, the amount of owner’s equity in this case is P 50,000.

Definitions in business of other terms used in this Self Learning Module:

1. Business transactions. This refers to an economic event or condition that directly

changes an entity’s financial condition or directly affects its results of operations.

Transactions are always looked upon from the business point of view.

2. Cash. This includes money in hand, petty cash, bank account balance, customer checks,

and marketable securities

3. Accounts receivable. This refers to accounts a business has the right to receive because it

has delivered a product or service.

4. Supplies. A current asset representing the cost of supplies on hand at a point in time.

5. Equipment. This is a noncurrent or long-term asset account which reports the cost of the

equipment
6. Vehicles. This is defined as a long-term asset account that reports a company's cost

of automobiles, trucks, etc.

7. Office Furniture. This refers to furniture and fixtures that are larger items than movable

equipment that are used to furnish an office.

8. Land. This is defined as the ground the company uses for business operations; it includes

ground on which the company locates its headquarters or land used for outside storage space

or as a parking lot. Unlike a majority of fixed assets, land is not subject to depreciation.

9. Building. This is a noncurrent or long-term asset account which shows the cost of a

building (excluding the cost of the land)

10. Accounts Payable. This refers to an account within the general ledger that represents a

company's obligation to pay off a short-term debt to its creditors or suppliers.

11. Notes Payable. This refers to a general ledger liability account in which a company

records the face amounts of the promissory notes that it has issued......the amount not

due

within one year of the balance sheet date will be a noncurrent or long-term liability.

12. Loans Payable. This refers to charges interest, and is usually based on the earlier

receipt of a sum of cash from a lender.

13. Interest Payable. This is the interest expense that has been incurred (has

already occurred) but has not been paid as of the date of the balance sheet.

14. Utilities Expense. This is the cost incurred by using utilities such as electricity,

water, waste disposal, heating, and sewage.

15. Withdrawals. This also refers to the drawdown of an owner's account in a sole

proprietorship or partnership. In this situation, the funds are intended for personal use.

The withdrawal is not an expense for the business, but rather a reduction of equity
WHAT IS ACCOUNTING EQUATION
The relationship between the three basic accounting elements of the balance sheet -
Assets, Liabilities, and Owner’s Equity – can be expressed in the form of a simple equation
known as the Accounting Equation.
All accounting information is recorded within the framework of the accounting
equation.

This Accounting Equation is :

Asset = Liability + Owner’s Equity

P 500,000 = P200,000 + P 300,000

Or

Asset - Liability = Owner’s Equity

P 500,000 - P200,000 = P 300,000

The accounting equation must always balance. The peso amount on the left side of the
equation should always equal to the peso amount on the right side of the equation. If assets
increase, liabilities and/or owner’s equity must increase by the same amount. If assets
decrease, liabilities and / or owner’s equity must also decrease. An increase in an asset may
also have a corresponding decrease in another asset or an increase in a liability may also have
a corresponding decrease in another liability. (Ricardo, 2007)
ILLUSTRATIVE EXAMPLES:
Below are the detailed examples and explanations of Accounting Equation for the
learners to thoroughly understand the topic:

A. If assets increase, liabilities and/or owner’s equity must increase by the same amount.

Business transaction 1: Mr. Agor invested P100,000 to start a printing business.

Accounting Equation :

Asset = Liability + Owner’s Equity

Cash – P 100,000.00 = 0 + Agor, Capital – P 100,000.00
➢ Explanations: In this case, Mr. Agor put up a capital in the amount of 100,000, thus there is
an increase on the asset as well as on the owner’s equity. (If assets increase (cash), owner’s
equity must increase by the same amount. Try to check if the statement is true. Does the asset
equate with liabilities and owner’s equity?)

Business transaction 2:
Purchased supplies on account, P 20,000.
Accounting Equation:
Asset = Liability + Owner’s Equity
Supplies -P 20,000 = Accounts Payable- P 20,000 + 0

➢ Explanations:

The business acquired or purchased supplies from other business entity or supplier on credit. What
happened here is that there is a value received which is an asset (supplies) in exchange of an obligation
to pay, liability (accounts payable).

(If assets (supplies) increase, liability (accounts payable) must increase by the same amount. Try to
check if the statement is true. Does the asset equate with liabilities and owner’s equity?)

B. If assets decrease, liabilities and / or owner’s equity must also decrease.

Business transaction 3: Issued partial payment of P 2,000.00 for supplies bought on account.

Accounting Equation :

Asset = Liability + Owner’s Equity

Cash - (P 2,000) = Accounts Payable- (P2,000.00) +
0

➢ Explanations:
In this case there is a reduction of asset (cash) as well as reduction of obligation or
liability . (If assets decrease (cash), liabilities (accounts payable) must also decrease. Try to
check the accounting equation if the statement is true and that the asset equate with liability
and owner’s equity)
Business transaction 4: Issued payment of P 1,000 for utilities.
Accounting Equation :
Asset = Liability + Owner’s Equity
Cash - (P 1,000) = 0 + Utilities Expense– (P1,000)
➢ Explanations:

The business pay the utilities being used in generating income which is called an
expense of the business. Thus, there is a value given up, a reduction of cash as well as a
reduction of income because an expense in the business can lessen income. This will be
explained in detailed on Week 9 SLK)

(If assets decrease (cash), owner’s equity must also decrease. Try to check if the
statement is true and the asset equate with liabilities and owner’s equity.

C. An increase in an asset may also have a corresponding decrease in another asset

Business transaction 5: Cash purchased of office furniture, P3,000.

Accounting Equation :

Asset = Liability + Owner’s Equity

Cash - (P 3,000)
Office furniture- P3,000 = 0 + 0

➢ Explanations:
The business acquired office furniture to be used to furnish an office. So, what will
happen here is the business received an asset (office furniture) and given up (cash)

[An increase in an asset (office furniture) may also have a corresponding decrease in
another asset (Cash) .Try to check if the statement is true and the equation is still balance]

D. An increase in a liability may also have a corresponding decrease in another liability

Business transaction 6: Mr. Agor, the owner-manager of the business issued a promissory
note for the remaining balance of transaction no. 2 that was long due.

(Transaction number 2, was partially paid on transaction no. 3, The remaining balance for the
supplies bought on account is P18,000.)

Accounting Equation :

Asset = Liability + Owner’s Equity

0 = Accounts Payable – (P 18,000) + 0
Notes Payable - (P 18,000)

➢ Explanations:

The business here issued promissory note in liue of the accounts payable. This kind of
business transaction will usually happen if a liability that should have been paid but that for
some reason has failed to pay, and this may reduce creditworthiness. Issuing notes to creditors
usually requires interest]

[An increase in a liability may also have a corresponding decrease in another liability.
Try to check if the equation is still balance and the statement is true.)

All the possible cases that may happen in business were already given above.

Always remember the following:

III. What
1. Assets are Have I Learned
resources owned by the business.
2. Liabilities are obligations by the business.
POST TEST:
3. 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 and there are
four elements that affect equity: (1) Investment; (2) Withdrawal; (3) Revenue, and;
(4) Expenses.
SOLVING PROBLEMS ON ACCOUNTING EQUATION

Here are the summary of simple cases/problems and its solutions to the problems using
accounting equation:

Business transactions:
1. Mr. Agor invested P100,000 to start a printing business.
2. Purchased supplies on account, P 20,000.
3. Issued partial payment of P 2,000.00 for supplies bought on account.
4. Issued payment of P 1,000 for utilities.
5. Cash purchased of office furniture, P3,000.
6. Mr. Agor issued a promissory note for the remaining balance of transaction no. 2 that
was long due.
Solutions of the problems using the accounting equation:

Asset = Liability + Owner’s Equity

1. Cash - 100,000 = + Agor,Capital - 100,00

2. Supplies - 20,000 = Accounts Payable- 20,000 +

3. Cash - (2,000) = Accounts Payable- ( 2,000) +

4. Cash - (1,000) + Utilities Expense-(

1,000)

5. Cash - (3,000) = + Office Furniture - 3,000

6. = Accounts Payable- ( 18,000) + Notes Payable - 18,000

Now, compute for the total assets, liabilities and owner’s equity. Does the total of assets equal
to total liabilities and owner’s equity?

III. What Have I Learned

POST TEST:

Instructions: Sample answer sheets are provided. Copy and write your FINAL answers on
your notebook. Read and analyse the business transactions or activities. No. 1 is done for
you.
1. Equate assets with liabilities and owner’s equity using each item on business
transactions activities.
2. Write the accounting equation with its corresponding figures after solving the
total asset, liabilities and owner’s equity

On October of the current year, Ms. D. Diaz started an auto repair business.
1. She invested P 200,000 to start an auto repair business.
2. She bought repair equipment on credit, P 100,000.
3. Bought shop supplies for cash, P 62,000.
4. Paid partial on equipment bought on account, P 60,000
5. Received a bank loan for business use, P 100,000.
6. Customers pay cash for auto repairs rendered, P 25,000
7. Repair services rendered on account, P 50,000.
8. Paid a month’s rent, P 10,000.
9. Collects partial from customers’ account, P30,000.
10. Pays the salaries and wages of laborers, P15,000.
11. Billed a customer, P6,000; P 2,000 was partially received.
12. Supplies purchased, P 15,000 and P5,000 was partially paid.
13. Shop supplies used and paid, P 18,000
14. Diaz withdrew P 20,000 for personal use
 DEPARTMENT OF EDUCATION
SCHOOLS DIVISION OF NEGROS ORIENTAL

SENEN PRISCILLO P. PAULIN, CESO V

Schools Division Superintendent

JOELYZA M. ARCILLA, EdD

Assistant Schools Division Superintendent

MARCELO K. PALISPIS, EdD

Assistant Schools Division Superintendent

NILITA L. RAGAY, EdD

OIC - Assistant Schools Division Superintendent
CID Chief

ROSELA R. ABIERA
Education Program Supervisor – (LRMS)

ELISA L. BAGUIO, EdD

Division Education Program Supervisor – MATHEMATICS

MARICEL S. RASID
Librarian II (LRMDS)

ELMAR L. CABRERA
PDO II (LRMDS)

DONNA D. FRANCISCO
Writer

NAME OF ILLUSTRATOR/LAY-OUT
ARTIST/TYPESETTER
Illustrator/Lay-out Artist
BB.Boy Jonel Diaz

ALPHA QA TEAM
LITTIE BETH S. BERNADEZ
MERCYDITHA D. ENOLPE
RONALD G. TOLENTINO

BETA QA TEAM
ELIZABETH A. ALAP-AP
EPIFANIA Q. CUEVAS
NIDA BARBARA S. SUASIN
VRENDIE P. SYGACO
MELBA S. TUMARONG
HANNAHLY L. UMALI
 REFERENCES

https://xplaind.com/673055/accounting-equation
Harina, R. 2007. College 1 Accounting: Cacho Hermanos, Inc.

Tugas, F., Salendrez, H. & Rabo, J. 2016. Fundamentals of Accountancy, Business and Management
1: Lexicon Press, Inc.

Definition of Business and Other terms. Retrieved July 28, 2020 from
http://www.accountingtools.com

Definition of Terms and some examples of the parts of Accounting Equation. Retrieved July 28, 2020
from http://www.accountingcoach.com