Senior High School

Fundamentals of
Accountancy, Business
and Management 1
Quarter 3 - Module 3:
The Accounting Equation
(Week 3)

What I Need To Know

For the Learners

This is an introductory course in accounting, business and management

data analysis that will develop your appreciation of accounting as language
of business and an understanding of basic accounting concepts and
principles that will help you analyze business transactions.

Good Job! Thank you for completing Module 2. You are now ready for
the next lesson which is The Accounting Equation. You need to learn more
effectively. Good luck!
Module Content

This module in Fundamentals of Accountancy, Business and Management 1

for the 21st century learners is designed to make learning more engaging and
meaningful to ABM Senior High School learners in the flexible and blended learning
environments.

In this module, you will be acquainted with the fundamental accounting

equation which will serve as your guide in the business world. You will have a better
understanding of the components of the accounting equation and the relationship
between and among the accounting elements. The accounting terms such as Assets,
Liabilities, Owner’s Equity will be discussed thoroughly and you will be able to put
your understanding to test as you will be given the opportunity to solve simple cases
using the lessons you will learn through this module.

Learning is fun! So enjoy your journey as you unfold the most interesting and
worthwhile activities in accounting.

These are the competencies included in this module:

• Illustrate the accounting equation (ABM_FABM11- IIIb-c-17)

• Perform operations involving simple cases with the use of accounting equation
(ABM_FABM11- IIIb-c-18)

What I Know

Let us check your prior knowledge about this module’s coverage.

Directions: Encircle the letter of the best answer.

1. It shows the relationship between a company’s assets, liabilities, and capital.

a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation

2. This refers to the economic resources owned by the company.

a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation

3. This refers to the property and rights owned by the business..

a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation

2
 4. This refers to the investment of an owner.
a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation

5. These include claims of the creditors on the assets of the company.

a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation

6. This refers to the obligations to pay and debts of a company.

a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation

7. This has to show a balance in every business transaction.

a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation

8. This includes a company’s cash, supplies, and equipment.

a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation

9. This shows no changes when an owner invests additional cash in the business.
a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation

10. This demonstrates the dual aspect of a business transaction and proves
that Debit = Creditl.
a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation

The Accounting Equation

What’s In

Activity 1. Review

Complete the statement.

In the previous module, I learned that _____________________________________

__________________________________________________
__________________________________________________
2

2
 What’s New

Activity 2. Find the missing values.

ASSETS LIABILITIES OWNER’S EQUITY

1 250,000 150,000 100,000
2 665,000 347,000
3 234,000 434,000
4 123,000 23,000
5 876,000 500,000
6 15,000 5,999
7 1,089,021.18 396,156.93
8 68,000 66% of assets
9 1/3 of owner’s equity 143,628
10 164% of liabilities 26,007

What Is It

The accounting equation formula represents the relationship between the assets,
liabilities, and owner's equity of a business. The value of a company's assets should
always equal the sum of its liabilities and owner's equity. The underlying concept of
this formula is that every asset acquired by a company was financed either through
debt (liability) or through investment from owners (owner’s equity).

The accounting formula materializes a company's assets in terms of its liabilities

and owner’s equity. This simple formula serves as the foundation of double-entry
bookkeeping wherein there are always two account entries made for each
transaction—a debit to one account and a credit to another.

Keep reading to have a better understanding of the accounting formula basics, its
elements, and its relationship to one another.

The Accounting Equation

2
The Elements of the Accounting Equation

1. Assets - these are economic resources owned by the company expected for future
gain. They are property and rights of value owned by the company.

Assets refer to items like cash, inventory, accounts

receivable, buildings, land, or equipment. Purchasing
something with the company’s cash on hand will not
affect the accounting equation because it's just
converting one type of asset (cash) into another type of
asset (inventory, equipment, or whatever else is
purchased). The accounting formula doesn't differentiate
between types of assets.

2. Liabilities - these are debts or obligations, which are..

amounts owed to others. These include debts,..
obligations to pay, and claims of the creditors on the..
assets of the company. Liabilities are one of three ways..
in which a business can acquire funding.

Liabilities can include bank loans, credit card accounts,..

or accounts payable (such as when a supplier offers to..
extend credit to a business).

3. Owner’s Equity - these are the total capital the..

owners have invested in the business. These include..
the .interest of the owners on the company; claims of…
the .owners on the assets of the company; and the..
investment of the owner plus or minus the results on the..
operations of the company.

Owner’s Equity or capital comes from two main sources:.

investment of owners and earning from the company.

2
 Let us put into practice the accounting equation above. For example, if Company
Tibs owns Php100,000 in assets but owes Php30,000 to creditors, how much would
be the total claim of the owners?

Assets = Liabilities + Owner’s Equity

Php100,000 = Php30,000 + ?
Php100,000 = Php30,000 + Php70,000
Php100,000 = Php100,000

The equity to which owners/investors have a claim is Php70,000. As you can see,
the accounting formula is all about balance. Any activity on the right side is reflected
on the left side.

Here are some more examples:

1. Given liabilities of Php10,000 and the owner’s equity of Php50,000, find the value
of the assets.

Assets = Liabilities + Owner’s Equity

Assets = Php10,000 + Php50,000
Assets = Php60,000

2. Given assets of Php100,000 and the owner’s equity of Php70,000, find the
liabilities.

Assets = Liabilities + Owner’s Equity

Liabilities = Assets - Owner’s Equity
Liabilities = Php100,000 - Php70,000
Liabilities = Php30,000

3. Given assets of Php200,000 and liabilities of Php90,000, find the owner’s equity.

Assets = Liabilities + Owner’s Equity

Owner’s Equity = Assets - Liabilities
Owner’s Equity = Php200,000 - Php90,000
Owner’s Equity = Php110,000

Analyzing the Effects of Business Transactions to the Accounting Equation

The accounting equation shows that for every debit, there must be an equal credit.
As we have already discussed, Assets, Liabilities and Owner’s Equity are the three
components of the accounting equation that make up a company’s balance sheet.
Accounting Equation demonstrates the dual aspect of a business transaction and
proves that Debit = Credit. Here is a table to show you the effects of transactions on
the accounting equation.

2
 The following details will include the amount and the account affected in
illustrating the effects on the accounting equation. Notice that the accounting
equation is always balanced in every transaction such that assets are always equal to
liabilities and owner’s equity.

TRANSACTION ASSETS LIABILITIES OWNER’S ANALYSIS

EQUITY
1. Mr. Pacs Increase No Change Increase The cash
invests cash of Cash Mr. Pacs, investment of Mr.
Php10,000 Capital Pacs increases the
assets of the
business and the
capital (owner’s
equity) of the owner.
2. Mr. Pacs Increase No Change Increase The equipment
invests equipment Equipment Mr. Pacs, increases the
amounting to Capital assets of the
Php100,000 business. Since this
is an investment of
Mr. Pacs, her
capital
correspondingly
increases.

52
 3. Renders Increase No Change Increase The business earns
Php5,000 services Cash Service cash by rendering
for cash Income services. There is
increase in assets
for the cash
collected and
increase in capital
as revenue
increases capital.
4. Purchases Increase Increase No Supplies increase
P1,000 supplies Supplies Accounts Change the assets of the
on credit Payable business. Liabilities
correspondingly
increase as the
supplies were
bought in credit.
5. Purchases Increase No Change No Land increases the
Php200,000 Land Land Change assets of the
paying cash business. Cash
Decrease correspondingly
Cash decreases with the
cash paid for the
purchase of land.

What’s More

Activity 3.

1. What is the fundamental accounting equation?

2. What are assets, liabilities, and owner’s equity?

6
2
Activity 4. Your Turn

Give the effect of the following transactions on the accounting equation.

On August 21, 2020, Don JPacs opens Pacs Laundry Services. On the
transaction summary table below, indicate the effect of each transaction to each
account. Put “+” to signify increase or “-” to signify decrease. Indicate the amount of
increase or decrease for each account. The first one is done for you.

TRANSACTION ASSETS LIABILITIES OWNER’S

EQUITY
1. Don Jpacs invested + +
Php100,000 cash in the Php100,000 Php100,000
business.
2. Bought Php2,000 worth of
supplies by cash.
3. Borrowed Php50,000 cash
from Don Almabs.
4. Services rendered to client
on credit worth Php5,000
5. Cash services rendered to
Ms. Rastaken, Php10,000

What I Have Learned

Reflective Question:

How can you apply the Accounting Equation to your daily transactions as a
student and as a consumer? What are some examples of these transactions?

2
 What I Can Do

Activity 5. My Own Accounting Equation

Applying the Accounting Equation to your daily life as a student and consumer, write
your transactions made on a day to day basis and analyse the effects of each
transaction to the different accounting accounts.

TRANSACTION ASSETS LIABILITIES OWNER’S

EQUITY

2
 Assessment

Let us check how much you learned from this module’s coverage.
Directions: Choose the corresponding answer from the word box and write it on the
space provided before each number.

Assets Decrease

Increase No Changes

Liabilities Owner’s Equity

Balanced Sheet Accounting Equation

_______________ 1.This refers to the obligations to pay and debts of a company.

_______________ 2. This refers to the economic resources owned by the company.

_______________ 3. This has to show a balance in every business transaction.

_______________ 4. This demonstrates the dual aspect of a business transaction

and proves that Debit = Credit.

_______________ 5. This refers to the property and rights owned by the business..

_______________ 6. This refers to the investment of an owner.

_______________ 7. These include claims of the creditors on the assets of the

company.

_______________ 8. This includes a company’s cash, supplies, and equipment.

_______________ 9. It shows the relationship between a company’s assets,

liabilities, and capital.

_______________ 10. This shows no changes when an owner invests additional

cash in the business.

2
 Fundamentals of
Accountancy, Business
and Management 1
Quarter 3 - Module 4:
Types of Major Accounts
(Week 4)
What I Need To Know

For the Learners

This is an introductory course in accounting, business and management

data analysis that will develop your appreciation of accounting as language
of business and an understanding of basic accounting concepts and
principles that will help you analyze business transactions.

Good Job! Thank you for completing Module 3. You are now ready for
the next lesson which is the Types of Major Accounts. You need to learn
more effectively. Good luck!

Module Content

This module in Fundamentals of Accountancy, Business and Management 1

for the 21st century learners is designed to make learning more engaging and
meaningful to ABM Senior High School learners in the flexible and blended learning
environments.
After learning about the accounting equation, it is important to understand the
five major accounts in accounting. You will get to apprehend more about Assets,
Liabilities, Owner’s Equity/Capital, Income/Revenue, and Expense. At the end of this
module, not only will you obtain knowledge on the types of accounts but you will also
get to make your own Chart of Accounts.
10

2
 Learning is fun! So enjoy your journey as you unfold the most interesting and
worthwhile activities in accounting.

These are the competencies included in this module:

 Discuss the Five Major Accounts (ABM_FABM11- IIId-e-19)

 Prepare a Chart of Accounts (ABM_FABM11- IIId-e-21)

What I Know

Let us check your prior knowledge about this module’s coverage.

Fill in the blanks with your answer.

1. The _________________ includes everything that your company owns. It is

divided into tangible and intangible.

2. Any product or service that your company purchases to generate income or

manufacture goods is considered an _________________. This may include
advertising costs, utilities, rent, salaries and others.

3. _________________, one of the primary types of accounts in accounting,

includes the money your company earns from selling goods and services. This term
is also used to denote dividends and interest resulting from marketable securities.

4. _________________ include the debts or obligations payable to creditors and

other outsiders to which your company owes money. These can be loans, unpaid
utility bills, bank overdrafts, car loans, mortgages and more.

5. The ________________ defines how much your business is currently worth. It's
the residual interest in your company's assets after deducting liabilities. Common
stock, dividends and retained earnings are all examples of this.

11

2
 The Five Major Accounts &
The Chart of Accounts

What’s In

Activity 1. Review

Complete the statement.

In the previous module, I learned that _____________________________________

__________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________

What’s New

Activity 2. Scrambled Words

Directions: Correct the scrambled words below.

1. Tangible and intangible items that the Company owns that have value.
 _______________ (EASSST)

2. Money that the Company owes to others.

 _______________ (ABLITILIESI)

3. Money the company earns from its sales of products or services, and interest and
dividends earned from marketable securities.
 _______________ (CINEMO)

4. Money the company spends to produce the goods or services that it it sells.
 _______________ (PEENSSEX)

12

2
5. That portion of the total assets that the owners or stock holders of the company
fully own; have paid for outright.
 _______________(YQUITE)

What Is It

There are five main types of accounts in accounting, namely: assets, liabilities,
capital / owner’s equity, income, and expense. Continue to read below to explore
on how each account can be further broken down into several categories.

FIVE TYPES OF MAJOR ACCOUNTS

4. ASSETS - These are all the economic resources owned by the company and are
expected for future gain. They include property and rights of value owned by the
company. Assets refer to items like cash, inventory, accounts receivable, buildings,
land, or equipment.

Assets can be categorized to Tangible and Intangible. Tangible assets are the
physical entities that the business owns such as its land, buildings, vehicles,
equipment, and inventory. While intangible assets are the things that represent
money or value such as Accounts Receivables, patents, contracts, and certificates of
deposit (CDs).

Two types of Assets:

1. Current Assets - cash and other assets that are expected to be converted to
cash within a year.

Examples:

 Cash includes coins, currencies, checks, bank deposits, and other

cash items readily available for use in the operations of the business

 Cash equivalents are short-term investments that are readily

convertible to known amounts of cash which are subject to an
insignificant risk to changes in value

 Marketable securities are stocks and bonds purchased by the

enterprise and are to be held for only a short span of time or duration.
They are usually purchased when a business has excess cash.

13

2
 2. Non-Current Assets - an asset that is not likely to turn to unrestricted cash
within one year. It is also referred to as a long-term assets.

Examples:

 Long-term investments are assets held by an enterprise for the

accretion of wealth through capital distribution such as interests,
royalties, dividends and rentals, for capital appreciation or for other
benefits to the investing enterprise such as those obtained through
trading relationships.

 Property, plant, and equipment are tangible assets that are held by an
enterprise for use in the production or supply of goods or services, or
for administrative purposes.

a. Land - a piece of lot or real estate

b. Building - structure used to accommodate the office, store, or factory
c. Equipment - includes typewriter, air-conditioner, calculator, filing
cabinet, computer,electric fan, trucks, and cars used by the business
in its office or factory. Specific account titles may be used such as:
-office equipment,
-store equipment,
-delivery equipment,
-transportation equipment, and
-machinery equipment.
d. Furniture and fixtures - include tables, chairs, carpets, curtains,
lamp and lighting fixtures. Specific account titles may be used
such as:
-office furniture and fixtures
- store furniture and fixtures

2. LIABILITIES - These include the debts or obligations payable to creditors and

other outsiders to which your company owes money. Liabilities are one of three
ways in which a business can acquire funding.

Two types of Liabilities:

1. Current Liabilities - amounts due to be paid to creditors within twelve

months.

Examples:

 Accounts payable includes debts arising from the purchase of an asset

or the acquisition of services on account.
14

2
  Notes payable includes debts arising from the purchase of an asset or
the acquisition of services on account evidenced by a promissory note.
 Loan Payable is a liability to pay the bank or other financing institution
arising from funds borrowed by the business from these institutions
payable within twelve months or shorter.

 Utilities payable is an obligation to pay utility companies for services

received from them. Examples of this are telephone services, electricity,
and water services.

 Unearned revenues represent obligations of the business arising from

advance payments received before goods or services are provided to
the customer. This will be settled when certain goods or services are
delivered or rendered.

 Accrued liabilities include amounts owed to others for expenses already

incurred but are not yet paid. Examples of these are salaries payable,
utilities payable, taxes payable, and interest payable.

2. Non-current Liabilities - are long term liabilities or obligations which are

payable for a period longer than one year.

Examples:

 Mortgage payable is a long-term debt of the business with security or

collateral in the form of real properties.

 Bonds payable is a certificate of indebtedness under the seal of a

corporation, specifying the terms of repayment and the rate of interest
to be charged.

3. OWNER’S EQUITY - defines how much your business is currently worth.

Owner’s Equity or Capital is an account bearing the name of the owner
representing the original and additional investment of the owner of the business.
It is increased by the amount of net income earned during the year and
decreased by the cash or other assets withdrawn by the owner as well as the
net loss incurred during the year.

Drawing represents the withdrawals made by the owner of the business in cash or
other assets.

Two types of Equity:

1. Contribution (Investments) - may be start-up capital or a later infusion of cash.

15

2
 2. Drawing (Withdrawals) - If a business is profitable, the owners often want
some of the profit returned to them.

4. INCOME OR REVENUE - is money the business earns from selling a product or

service, or from interest and dividends on marketable securities. Other names for
income are revenue, gross income, turnover, and the "top line."

Net income is computed as revenue less expenses. Other names for net income
include profit, net profit, and the "bottom line." Income accounts are classified
as temporary or nominal accounts. This is because their balance is reset to zero at
the beginning of each new accounting period.

5. EXPENSES - these are money the company spends that allow a company to
operate. This may include advertising costs, utilities, rent, salaries and others. Like
revenue accounts, expense accounts are temporary accounts that collect data for
one accounting period and are reset to zero at the beginning of the next accounting
period.

A unique type of Expense account, Depreciation Expense, is used when

purchasing Fixed Assets. Costly items, such as vehicles, equipment, and computer
systems, are not expensed, but are depreciated over the life expectancy of the item.
A contra-account, Accumulated Depreciation, is used to offset the Asset account for
the item.

Examples:

 Salaries or wages expense include all payments made to employees or

workers for rendering services to a company.

 Utilities expense is an expense related to the use of electricity, fuel,

water, and telecommunication facilities.

 Supplies expense covers office supplies used by a business in the

conduct of its daily operations.

 Insurance expense is the expired portion of premiums paid on

insurance coverage such as premiums paid for health or life insurance,
motor vehicles, or others.

 Depreciation expense is the annual portion of the cost of tangible

assets such as buildings, machineries, and equipment charged as
expense for the year.

 Uncollectible accounts expense/doubtful accounts expense/bad debts

expense means the amount of receivables charged as expense for the
period because they are estimated to be doubtful of collection.
16

2
  Interest expenses is the amount of money charged to the borrower for
the use of borrowed funds.

CHART OF ACCOUNTS

A chart of accounts is a list of all your company’s accounts used, and is listed
together in one place. The main account types include Assets, Liabilities, Owner’s
Equity, Income, and Expenses.

Here’s a sample chart of accounts list. This is a chart of accounts for a fictional
business: Ewing Cleaning Supply.

Figure 1. Chart of Accounts

Companies in different lines of business will have different looking charts of

accounts. The chart of accounts should give anyone who is looking at it a rough idea
of the nature of your business by listing all the accounts involved in your company’s
day-to-day operations.
The chart of accounts is designed to be a map of your business and its various
financial parts. A well-designed chart of accounts should separate out all the
company’s most important accounts, and make it easy to figure out which
transactions get recorded in which account.

17

2
 What’s More

Activity 3.

Identify each account if it is part of the Asset, Liability, Owner’s Equity, Income, or
Expense. Write your answers on the spaces provided before each number.

_________________ 1. Partner A, Drawings

_________________ 2. Prepaid Insurance
_________________ 3. Revenue
_________________ 4. Salaries
_________________ 5. Interest Payable
_________________ 6. Land
_________________ 7. Common Stock
_________________ 8. Bonds Payable
_________________ 9. Unearned Revenue
_________________ 10. Office Equipment
_________________ 11. Machinery Equipment
_________________ 12. Uncollectible accounts
_________________ 13. Partner B, Capital
_________________ 14. Wages
_________________ 15. Cash

18

2
 What I Have Learned

Discuss the following terms based on your own understanding.

1. Owner’s Equity-

2. Revenue or Income-

3. Assets-

4. Expenses-

5. Liabilities-

19

2
 What I Can Do

Activity 4. My Personal Chart of Accounts

Applying the lessons you learned on the chart of accounts, create your fictional
business and make your very own chart of accounts. Follow the format below.

CHART OF ACCOUNTS

Account Account Title Account Account Title

Number Number

20

2
 Assessment

Let us check how much you learned from this module’s coverage.

Essay.

1. In your own opinion, why do companies need to create their personalized Chart of
Accounts?

2. In your own opinion, is it better for a company to acquire current or non-current

assets?

3. Differentiate current and non-current liabilities.

21