Fundamentals of

Accountancy, Business &

Management 1 Accountancy
Quarter 3 – Week 4
Topic:
The Basic Accounting Equation

Second Semester
1
 Lesson: Basic Accounting Equation

Most Essential Learning Competencies:

1. Illustrate the accounting equation ABM_FABM11- IIIb-c-17
2. Perform operations involving simple cases with the use of accounting equation
ABM_FABM11- IIIb-c-18

All processes of an accounting system must observe the equality of the

accounting equation, which is basically an algebraic equation. The basic accounting
equation is shown below:

Assets Owner‟s
Liab ility Equity

 The left side of the equation represents twhat the company owns and the right
side represents the claims of the different parties to the company’s assets.
 ASSETS are the resources you control that have resulted from past events
and can provide you with future economic benefits
 LIABILITIES – are your present obligations that have resulted from past
events and can require you to give up resources when settling them.
 EQUITY – is simply assets minus liabilities. Other terms for equity are
“capital”, “net assets,” and “net worth. This is will be affected by Revenue
(+) and Expenses (-)

Note: the two sides of the equation should always be balanced. Hence, what the
company owns should always equal what it owes to its owners.

TYPES AND EFECTS OF TRANSACTIONS

1. Source of Assets (SA). An account increase and a corresponding claims account
increases.
Example:
a. Purchase of supplies on account
b. Sold of goods in cash on delivery basis
2. Exchange of Assets (EA). One asset account increases and another asset
decreases
Example:
a. Acquired equipment for cash
3. Use of Assets (UA). One asset account decreases and a corresponding claims
account decreases
Example:
a. Settled accounts payable
b. Paid salaries of employees

2
 4. Exchange of Claims. One claim account increases and another claim account
decreases
Example:
a. Received utilities bill but did not pay

The four types of transaction above may be further expanded into nine types of
effects as follows:
Increase in Assets =Increase in Liabilities
Increase in Assets =Increase in O.E
Increase in one Assets =Decrease in another Assets
Decrease in Assets =Decrease in Liabilities
Decrease in Assets =Decrease in O.E
Increase in Liabilities =Decrease in O.E
Increase in O.E =Decrease in Liability
Increase in One Liability =Decrease in Another Liability
Increase in O.E =Decrease in O.E

USING THE ACCOUNTING EQUATION

Illustration:
Martin Penaco decided to establish a sole proprietorship business and named it
as Penaco WebPage Express. The entity is into designing websites. He also enters into
agreements with clients for the progressive development and maintenance of their
websites. The owner, Martin Penaco, makes business decisions. The asset of the
company belongs to Penaco and all obligations of the business are his responsibility.
Any income that the entity earns belongs solely to Penaco.

During May 2006, the first month of operations, various financial transactions took
place. These transactions are described and analyzed as follows:
May 1 Penaco started his new business by depositing P250 000 in a bank account
in the name of Penaco WebPage Express at BDO.

Penaco WebPage Express

Financial Transaction Worksheet
Month of May 2006
ASSET = LIABILITIES + Owner’s Equity
Cash Penaco, Capital
(1) P250 000 P250 000
 An economic resource – cash of P250 000 is invested in the business enty. The
source of this asset is the contribution made by the owner, which represents
owner’s equity. The owner’s equity account is Penaco, Capital.

May 5 Computer equipment costing P178 000 is acquired on cash basis

Assets = Liabilities + Owner’s Equity
Cash Computer = Penaco, Capital
Equipment
Bal. P250 000 = P250 000
(5) (178 000) P178 000 =
Bal 72 000 178 000

3
 P250 000 = P250 000
 This transaction did not change the total asset but it did change the composition
of the assets – it decreases one asset (cash) and increase another asset
(computer equipment)

May 9 Computer supplies in the amount of P9 000 are purchased on account.

ASSETS = LIABILITIES + O. EQUITY
Computer Computer Accounts Penaco,
Cash = +
Supplies Equipment Payable Capital
Bal P72 000 P178 000 = P250 000
(9) P9 000 = P9 000
Bal 72 9 000 178 000 = 9 000 + 250 000
000
P259 000 = P259 000
 Assets don’t have to be purchased in cash, it can also be purchased on credit.
This transaction increase bohth the assets and the liabilities of the business
May 11 Penaco WebPage Express collected P77 000 in cash for designing basic
interactive website for two exporters based inside Cagayan Ecozone.
ASSETS = LIABILITIES + OWNER’S EQUITY
Cash Computer Computer = Accounts + Penaco, Service
Supplies Equipment Payable Capital Revenue
Bal P 72 P9 000 P178 000 P9 000 P250 000 P77 000
000
(11) 77 =
000
149 9 000 178 000 = 9 000 250 000 77 000
000
P336 000 = P336 000
 The entity earned service income by designing websites for clients. The effect on
the accounintg equation is an increase in asset (cash) and increase owner’s
equity (revenue+)

May 16 Penaco paid P15 000 to Bills Unlimited, a one stop bills payment service
company
ASSETS = LIABILITIES + OWNER’S EQUITY
Cash Computer Computer = Accounts + Penaco, Service Expense
Supplies Equipmen Payable Capital Revenue
t
Bal P149 P9 000 P178 000 P9 000 P250 P77 000
000 000
(16) (15 = (15 000)
000)
134 9 000 178 000 = 9 000 250 000 77 000 (15 000)
000
P321 000 = P321 000
 Expenses are recorded when they are incurred. It can be paid in cash when they
occur or they can be paid later. The payment of utilities is an outflow of
resources and a reduction of owner’s equity.

May 17 The entity has service agreements with several Netpreneurs to maintain and update
their existing websites weekly. Penaco billed these clients P25 000 for services already

4
 rendered during the month.

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash Accounts Computer Computer = Accounts Payable + Penaco, Service Expense
Receivable Equipment
Supplies Capital Revenue

Bal P134 000 P9 000 P178 000 P9 000 P250 000 P77 000 (15 000)
(17) P25 000 = 25 000
134 000 25 000 9 000 178 000 = 9 000 250 000 102 000 (15 000)
P346 000 = P346 000

 The entity has performed services to the clients so income should already be
recognized

May 19 Penaco maid partial payment of P7 000 for May purchase on account.

ASSETS = LIABILITIES + OWNER’S

EQUITY
Cash Accounts Computer Computer = Accounts Payable + Penaco, Service Expense
Receivable Equipment
Supplies Capital Revenue

Bal P134 000 P25 000 P9 000 P178 000 P9 000 P250 000 P102 000 (15 000)
(19) (7 = (7 000)
000)
127 000 25 000 9 000 178 000 = 2 000 250 000 102 000 (15 000)
P339 000 = P339 000

 The transaction is payment on account, thus, decreases the asset (cash) and
decreases liability (accounts payable)

May 20 Checks totaling P21 000 were received from clients for billing dated May 17

ASSETS = LIABILITIES + OWNER’S

EQUITY
Cash Accounts Computer Computer = Accounts Payable + Penaco, Service Expense
Receivable Equipment
Supplies Capital Revenue

Bal P127 000 P25 000 P9 000 P178 000 P2 000 P250 000 P102 000 (15 000)
(20) 21 000 (21 000)
148 000 4 000 9 000 178 000 = 2 000 250 000 102 000 (15 000)
P339 000 = P339 000

 The entity should not record service income since it was already recorded in the
17th. Total assets are unchanged. The business merely reduced one asset
(accounts receivable) and increased another (cash)

May 21 Penaco withdrew P20 000 from the business for his personal use.
ASSETS = LIABILITIES + OWNER’S
EQUITY
Cash Accounts Computer Computer = Accounts Payable + Penaco, Service Expense
Receivable Equipment
Supplies Capital Revenue

Bal P148 000 P 4 000 P9 000 P178 000 P2 000 P250 000 P102 000 (15 000)
(21) (20 (20
000) 000)
128 000 4 000 9 000 178 000 = 2 000 230 000 102 000 (15 000)
P319 000 = P319 000

 Withdrawal of transaction resulted to a reduction in both cash and owner’s

equity.

5
May 27 Daganta publishing submitted a bill to Penaco for P8 000 worth of internet
advertisement for this month. Penaco will pay the bill

ASSETS = LIABILITIES + OWNER’S

EQUITY
Cash Accounts Computer Computer = Accounts Payable + Penaco, Service Expense
Receivable Equipment
Supplies Capital Revenue

Bal P128 000 P 4 000 P9 000 P178 000 P2 000 P230 000 P102 000 (15 000)
(27) 8 000 (8 000)
128 000 4 000 9 000 178 000 = 10 000 230 000 102 000 (23 000)
P319 000 = P319 000

 The entity has incurred an advertising expense resulted to decrease in equity

and increase in liability

May 31 Penaco paid his assistant web designer salaries of P15 000 for the month

ASSETS = LIABILITIES + OWNER’S

EQUITY
Cash Accounts Computer Computer = Accounts Payable + Penaco, Service Expense
Receivable Equipment
Supplies Capital Revenue

Bal P128 000 P 4 000 P9 000 P178 000 P10 000 P230 000 P102 000 (23 000)
(27) (15 000) (15 000)
113 000 4 000 9 000 178 000 = 10 000 230 000 102 000 (38 000)
P304 000 = P304 000

 The entity has incurred a salaries expense resulted to decrease in equity and
increase in liability

Consolidated Answer:
Penaco WebPage Express
Financial Transaction Worksheet
Month of May 2006
ASSETS = LIABILITIES + OWNER’S
EQUITY
Cash Accounts Computer Computer = Accounts Payable + Penaco, Service Expense
Receivable Equipment
Supplies Capital Revenue

(1) P 250 P250 000

000
(5) (178 P178 000
000)
(9) P 9 000 P9 000
(11 77 000 P 77 000
)
(16 (15 000) (15 000)
)
(17 P25 000 25 000
)
(19 (7 000) (7 000)
)
(20 21 000 (21 000)
)
(21 (20 000) (20 000)
)
(27 8 000 (8 000)
)
(31 (15 000) (15 000)
)

6
 113 000 4 000 9 000 178 000 10 000 230 000 102 000 (38 000)
P304 000 P304 000

Assessment:
A. Red Dragon withdrew P250 000 from her personal savings account on June 1,
2017 and deposited he cash in an account for her newly established company,
Dragon’s Carpet Cleaning Service. During the month of June, the following
transactions occurred:
June 1 Paid monthly rent for office space, P25 000
2 Acquired cleaning supplies on accounts, P45 000
5 Acquired a service vehicle for P50 000, by issuing a note payable in that
amount, which will be due on May 31, 2018
6 Received cash in the amount of P120 000 for carpet cleaning services
rendered to PNB Main Building
9 Paid P15 000 for cleaning supplies acquired on June 2
13 Billed client P325 000 for carpet cleaning services rendered
15 Paid utilities bill of P12 000
16 Paid salaries of P64 000
20 Received 215 000 cash from clients billed on June 13
23 Red dragon withdrew P75 000 from the business

Follow this arrangement in answering the problem. Write your answer on your first
columnar.
(Name of the Business)
Financial Transaction Worksheet
Month of ______________

ASSETS = LIABILITIES + OWNER’S EQUITY

June Cash A/R Supplies Vehicle A/P N/P Capital Revenue Expense
1

Hint: Final balance is between P550 000 – P600 000 

B.
Jorge Camposano opened a plumbing service, Camposano Plumbing. Operations began
on April 2018 and the following transactions were completed during the month.

April 1 Withdrew P67 000 from a personal savings account and used it to open a new
account in the name of Camposano Plumbing
Apr 2 Acquired a service vehicle costing P81 000. A payment of P17 500 in cash was
made and a note payable given for the P63 500 remainder
April 3 Paid rent for the month, P7 150
April 6 Acquired plumbing supplies on account P15 700
April 7 Paid three months of advertising and recorded Prepaid Advertising in the
amount of P6 000
April 8 Cash in the amount of P18 350 was received for plumbing services rendered
April 9 Acquired additional plumbing supplies for cash, P8 050
April 11 Paid salaries, P11 600

7
 April 15 Rendered plumbing services and billed the customers, P42 200
April 16 Paid P5 700 of the amount owed from the transactions of Apr. 6
April 19 Paid miscellaneous expense, P4 300
April 20 Collected P21 000 from the customer on the Apr. 15 transaction
April 21 Withdrew P14 500 from the business
April 22 Paid salaries, P14 100
April 24 Paid the first instalment of the note payable, P3 850
April 25 Paid telephone expense, P1 250
April 27 Billed the Bel Company for plumbing services rendered, P14 150

Follow this arrangement in answering the problem. Write your answer on your first
columnar.
(Name of the Business)
Financial Transaction Worksheet
Month of ______________

ASSETS = LIABILITIES + OWNER’S EQUITY

Prepaid Service
April Cash A/R Supplies A/P N/P Capital Revenue Expense
Advertising Vehicle
1

Hint: Final balance is between P150 000 – P200 000 