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Chapter 3 The Accounting Equation

The document discusses the accounting equation and its elements. It explains that the basic accounting equation is Assets = Liabilities + Equity. It defines the key elements of assets, liabilities, and equity. It then expands on the basic equation to include revenues and expenses: Assets = Liabilities + Equity + Revenues - Expenses. The document provides examples of different types of transactions and how they affect the accounting equation. It concludes with practice problems applying the accounting equation.

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Portia Abestano
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277 views

Chapter 3 The Accounting Equation

The document discusses the accounting equation and its elements. It explains that the basic accounting equation is Assets = Liabilities + Equity. It defines the key elements of assets, liabilities, and equity. It then expands on the basic equation to include revenues and expenses: Assets = Liabilities + Equity + Revenues - Expenses. The document provides examples of different types of transactions and how they affect the accounting equation. It concludes with practice problems applying the accounting equation.

Uploaded by

Portia Abestano
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Chapter 3: The Accounting Equation (FAR

by: Millan)
Chapter 3
The Accounting Equation
Learning Objectives
1. Illustrate the accounting equation.
2. Perform operations involving simple cases
with the use of accounting equation.

Chapter 3: The Accounting Equation (FAR


by: Millan)
The Accounting Equation

Assets= Liabilities + Equity

Chapter 3: The Accounting Equation (FAR by: Millan)


Essential elements of an Asset
a. Control
b. Past events
c. Future economic benefits

Chapter 3: The Accounting Equation (FAR by: Millan)


Essential elements of a Liability
a. Present obligation
b. Outflow of economic benefits

Chapter 3: The Accounting Equation (FAR by: Millan)


EQUITY – is simply assets minus liabilities. Other
terms for equity are “capital”, “net assets”, and
“net worth”.

Chapter 3: The Accounting Equation (FAR


by: Millan)
The Expanded Accounting Equation

Assets = Liabilities + Equity + Income - Expenses

Chapter 3: The Accounting Equation (FAR by: Millan)


• INCOME – is increase in economic benefits
during the period in the form of increase in
assets, or decrease in liabilities, that result in
increases in equity, excluding those relating to
investments by the business owner.
• EXPENSES – are decreases in economic
benefits during the period in the form of
decreases in assets, or increases in liabilities,
that result in decreases in equity, excluding
those relating to distributions to the business
owner
Chapter 3: The Accounting Equation (FAR
by: Millan)
• The difference between income and expenses
represents PROFIT or LOSS.

• The profit or loss are closed to equity at the


end of each accounting period.

Chapter 3: The Accounting Equation (FAR


by: Millan)
Types and effects of transactions

1. Source of Assets (SA) - an asset account increases and a


corresponding claims (liabilities or owner’s equity) account
increases, e.g., purchase of supplies on account; sold goods on cash on
delivery basis.
2. Exchange of Assets (EA) - one asset account increases and another
asset account decreases, e.g., acquired equipment for cash.
3. Use of Assets (UA) - an asset account decreases and a
corresponding claim (liabilities or equity) account decreases, e.g.,
settled accounts payable; paid salaries of employees
4. Exchange of Claims (EC) - one claims (liabilities or owner’s equity)
account increases and another claims (liabilities or owner’s
equity)account decreases, e.g., received utilities bill but did not pay.

Chapter 3: The Accounting Equation (FAR


by: Millan)
Applications of the accounting
equation
1. If total assets is ₱10,000 and total liabilities is ₱6,000,
how much is the total equity?
2. If total liabilities is ₱5,000 and total equity is ₱4,000,
how much is the total assets?
3. If total assets is ₱10,000 and total equity is ₱3,000,
how much is the total liabilities?
4. If total income is ₱10,000 and total expenses are
₱3,000, how much is the profit or loss?
5. If total income is ₱10,000, total expenses are ₱8,000,
total liabilities is ₱7,000, and total equity (before
profit or loss) is ₱6,000, how much is the total assets?
Chapter 3: The Accounting Equation (FAR by: Millan)
OPEN FORUM
QUESTIONS????
REACTIONS!!!!!

Chapter 3: The Accounting Equation (FAR


by: Millan)
END

Chapter 3: The Accounting Equation (FAR


by: Millan)

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