Chapter 7 SECOND QUARTER

The Accounting
MODULE 1
Equation
I. Subject : Fundamentals of Accountancy, Business and Management 1
II. Topic : The Accounting Equation
III. Introduction
The accounting equation is a basic principle of accounting and a fundamental element of the balance
sheet. This equation sets the foundation of double-entry accounting and highlights the structure of the balance
sheet. For every change to an asset account, there must be an equal change to a related liability or
shareholder’s equity account.

IV. Learning Outcomes

After completing this topic, the student should be able to:

1. Determine the accounting equation; and

2. Perform operations involving simple cases with the use of the accounting equation.

V. Study Guide and Grading System

 EXAMINATIONS. There will be two major examinations during the semester. Each exam is tied to
computation, problem solving and applications of accounting concepts.
 DUE DATES for EXERCISES/PROJECTS. Due dates for Exercises/Projects will be provided as we
go along. You will have plenty of time to complete them. Any changes will be announced in class.
 GRADING SYSTEM. The grading system is based on the standard grading system prescribed by
Department of Education.

VI. Pre-test
Answer the following questions:
1. Define assets, liabilities, and equity.
2. Give at least five (5) examples that falls to assets, liabilities, and equity.
VII. Learning Content

A. THE ACCOUNTING EQUATION

Assets = Liabilities + Equity

For every transaction, the accounting equation should always be balanced.

B. 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 PHP800,000 cash and Cars amounting to PHP200,000.

Assets Liabilities Owner’s Equity

Cash Php 800,000.00
Reyes, Capital Php 1,000,000.00
Cars Php 200,000.00

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  Borrowings from the bank

July 2 – Reyes borrowed PHP100,000 cash from PNB for use in his business.

Assets Liabilities Owner’s Equity

Cash Php 900,000.00
Loans Payable Php 100,000 Reyes, Capital Php 1,000,000.00
Cars Php 200,000.00

 Asset purchased for cash

July 7 – Bought tables and chairs from Orocan and paid PHP45,000 cash

Assets Liabilities Owner’s Equity

Cash Php 900,000.00
Cars Php 200,000.00 Loans Payable Php 100,000 Reyes, Capital Php 1,000,000.00
Furniture Php 45,000.00

 Assets purchased on account

July 15 – Various equipment were purchased on account from Fortune for PHP55,000

Assets Liabilities Owner’s Equity

Cash Php 900,000.00
Cars Php 200,000.00 Loans Payable Php 100,000
Reyes, Capital Php 1,000,000.00
Furniture Php 45,000.00 Accounts Payable 55,000
Equipment Php 55,000.00

 Cash withdrawal by the owner

July 18 – Reyes made a cash withdrawal of PHP5,000 for personal use

Assets Liabilities Owner’s Equity

Cash Php 900,000.00
Cars Php 200,000.00 Loans Payable Php 100,000 Reyes, Capital Php 1,000,000
Furniture Php 45,000.00 Accounts Payable 55,000 Reyes, Drawing (5,000)
Equipment Php 55,000.00

 Payment of liability

July 20 – The account due to Fortune was paid in cash

Assets Liabilities Owner’s Equity

Cash Php 900,000.00
Cars Php 200,000.00 Reyes, Capital Php 1,000,000
Loans Payable Php 100,000
Furniture Php 45,000.00 Reyes, Drawing (5,000)
Equipment Php 55,000.00

The following table summarizes the effects of these transactions on the accounting equation:

Date ASSETS LIABILITIES OWNER’S EQUITY

Equipmen Loans Accounts Reyes, Reyes,
July Cash Cars Furniture
t Payable Payable Drawing Capital
1 800,000 200,000 1,000,000
2 200,000 100,000
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

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 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:

a. Accrual basis of accounting vs Cash basis of accounting – accrual basis recognizes revenue when earned
and recognizes expenses when incurred
b. Under the expense recognition principle, expenses can be recognized either as: (1) matching; (2)
systematic allocation, or; (3) direct association.
c. 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 PHP15,000 was received from the
customers.

Assets Liabilities Owner’s Equity

Cash Php 15,000 Service Revenue Php 15,000

 Paid cash for expenses incurred

July 22 – Cash was paid for the following: gas and oil, PHP500 and car repairs, PHP1,000.

Assets Liabilities Owner’s Equity

Gas & Oil (Php 500)
Cash Php (1,500)
Repair Exp. (Php 1,000)

 Revenue rendered on account

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
Service Revenue Php 16,000
Php 16,000

 Paid for expenses incurred

July 25 – Paid PHP500 for telephone bill.

Assets Liabilities Owner’s Equity

Cash (Php 500) Telephone Expense (Php 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 Php 10,000
Service Revenue Php 20,000
Accounts Rec. Php 10,000
 Customer’s account collected in cash

July 30 – The customer on July 24 paid 50% of his account in cash.

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 Assets Liabilities Owner’s Equity
Cash Php 8,000
Accounts Rec. ( Php 8,000)

 Paid cash for expenses incurred

July 31 – Paid PHP10,000 for rental of office space, and salaries of PHP9,000

Assets Liabilities Owner’s Equity

Rent Expense (Php 10,000)
Cash (Php 19,000)
Salaries Exp. (Php 9,000)

VIII. Learning Activity #1

For each transaction, tell whether the assets, liabilities and equity will increase (I), decrease (D) or is
not affected (NE).
Transactions A L E
1. The owner invest personal cash in the business
2. The owner withdraws business assets fro personal use.
3. The company receives cash from a bank loan
4. The company repays the bank that had lent money
5. The company purchases supplies on credit
6. The owner contributes her personal truck to the business
7. The company purchases supplies on credit
8. The company purchase land by paying half in cash and signing
a note
9. The owner withdraws cash for personal use
10. The company repays the suppliers

IX. Reference/s
Accounting Principles I. Retrieved January 18, 2021 at https://www.cliffsnotes.com/study-
guides/accounting/accounting-principles-i/principles-of-accounting/introduction-to-
accounting

Prepared by:

(SGD.) ANGELICA M. BENDECIO

Instructor