Fundamental of Accounting and Business Management
Lesson 7: The Accounting Equation
Study Materials October 2018
_____________________________________________________________________________________
Accounting Equation
The accounting equation is Assets = Liabilities + Equity
For every transaction, the accounting equation should always be balanced.
Assets – are resources owned by the business
Liabilities – are obligations by the business.
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.
There are four elements that affect equity:
1. Investment;
2. Withdrawal;
3. Revenue, and;
4. Expenses
Illustration of 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 PHP300,000 cash and Cars amounting to PHP200,000
ASSET = LIABILITIES + OWNER’S EQUITY
Cash PHP800,000 Reyes, Capital PHP1,000,000
Cars PHP200,000
Borrowings from the bank
July 2 – Reyes borrowed PHP100,000 cash from PNB for use in his business.
ASSET = LIABILITIES + OWNER’S EQUITY
Cash PHP900,000 Loan Payable PHP100,000 Reyes, Capital PHP1,000,000
Cars PHP200,000
Asset purchased for cash
July 7 – Bought tables and chairs from Orocan and paid PHP45,000 cash
ASSET = LIABILITIES + OWNER’S EQUITY
Cash PHP855,000 Loan Payable PHP100,000 Reyes, Capital PHP1,000,000
Cash PHP200,000
Furniture PHP45,000
, Assets purchased on account
July 15 – Various equipment were purchased on account from Fortune for PHP55,000
ASSET = LIABILITIES + OWNER’S EQUITY
Cash PHP855,000 Loan Payable PHP100,000 Reyes, Capital PHP1,000,000
Cash PHP200,000 Accounts Payable PHP55,000
Furniture PHP45,000
Equipment PHP55,000
Cash withdrawal by the owner
July 18 – Reyes made a cash withdrawal of PHP5,000 for personal use
ASSET = LIABILITIES + OWNER’S EQUITY
Cash PHP850,000 Loan Payable PHP100,000 Reyes, Capital PHP1,000,000
Cash PHP200,000 Accounts Payable PHP55,000 Reyes, Drawing (PHP5,000)
Furniture PHP45,000
Equipment PHP55,000
Payment of liability
July 20 – The account due to Fortune was paid in cash
ASSET = LIABILITIES + OWNER’S EQUITY
Cash PHP795,000 Loan Payable PHP100,000 Reyes, Capital PHP1,000,000
Cash PHP200,000 Reyes, Drawing (PHP5,000)
Furniture PHP45,000
Equipment PHP55,000
The following table summarizes the effects of these transactions on the accounting equation
Date ASSETS LIABILITIES OWNER'S EQUITY
July Cash Car Furnitur Equipment Loan Account Reyes, Reyes,
e Payable s Drawings Capital
Payable
1 800,000 200,000 1,000,000
2 100,000 100,000
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
20 (55,000) (55,000)
Balances 795,000 200,000 45,000 55,000 100,000 0 (5,000) 1,000,000
Lesson 7: The Accounting Equation
Study Materials October 2018
_____________________________________________________________________________________
Accounting Equation
The accounting equation is Assets = Liabilities + Equity
For every transaction, the accounting equation should always be balanced.
Assets – are resources owned by the business
Liabilities – are obligations by the business.
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.
There are four elements that affect equity:
1. Investment;
2. Withdrawal;
3. Revenue, and;
4. Expenses
Illustration of 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 PHP300,000 cash and Cars amounting to PHP200,000
ASSET = LIABILITIES + OWNER’S EQUITY
Cash PHP800,000 Reyes, Capital PHP1,000,000
Cars PHP200,000
Borrowings from the bank
July 2 – Reyes borrowed PHP100,000 cash from PNB for use in his business.
ASSET = LIABILITIES + OWNER’S EQUITY
Cash PHP900,000 Loan Payable PHP100,000 Reyes, Capital PHP1,000,000
Cars PHP200,000
Asset purchased for cash
July 7 – Bought tables and chairs from Orocan and paid PHP45,000 cash
ASSET = LIABILITIES + OWNER’S EQUITY
Cash PHP855,000 Loan Payable PHP100,000 Reyes, Capital PHP1,000,000
Cash PHP200,000
Furniture PHP45,000
, Assets purchased on account
July 15 – Various equipment were purchased on account from Fortune for PHP55,000
ASSET = LIABILITIES + OWNER’S EQUITY
Cash PHP855,000 Loan Payable PHP100,000 Reyes, Capital PHP1,000,000
Cash PHP200,000 Accounts Payable PHP55,000
Furniture PHP45,000
Equipment PHP55,000
Cash withdrawal by the owner
July 18 – Reyes made a cash withdrawal of PHP5,000 for personal use
ASSET = LIABILITIES + OWNER’S EQUITY
Cash PHP850,000 Loan Payable PHP100,000 Reyes, Capital PHP1,000,000
Cash PHP200,000 Accounts Payable PHP55,000 Reyes, Drawing (PHP5,000)
Furniture PHP45,000
Equipment PHP55,000
Payment of liability
July 20 – The account due to Fortune was paid in cash
ASSET = LIABILITIES + OWNER’S EQUITY
Cash PHP795,000 Loan Payable PHP100,000 Reyes, Capital PHP1,000,000
Cash PHP200,000 Reyes, Drawing (PHP5,000)
Furniture PHP45,000
Equipment PHP55,000
The following table summarizes the effects of these transactions on the accounting equation
Date ASSETS LIABILITIES OWNER'S EQUITY
July Cash Car Furnitur Equipment Loan Account Reyes, Reyes,
e Payable s Drawings Capital
Payable
1 800,000 200,000 1,000,000
2 100,000 100,000
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
20 (55,000) (55,000)
Balances 795,000 200,000 45,000 55,000 100,000 0 (5,000) 1,000,000
