FUNDAMENTALS OF ACCOUNTANCY, BUSINESS
AND MANAGEMENT 1
TOPIC :
THE ACCOUNTING EQUATION
Objectives:
Define the accounting equation:
Enumerate and explain the elements of the accounting equation
Solve basic problems applying the accounting equation
BASIC ACCOUNTING EQUATION
ASSETS= LIABILITIES + CAPITAL
The equation has two elements which equally divide the company into two parts.
ASSETS OF THE COMPANY
LEFT SIDE: represents what the company owns. Resources that the company controls in order to
attain future benefits.
LIABILITIES AND EQUITY OF THE COMPANY
RIGHT SIDE: represents what the company owes. Represents claims of the different parties to the
company’s assets.
Liabilities represents the claims of the company’s
creditors.
Equity represents the residual interest of the owners of
the company.
ASSETS= LIABILITIES + CAPITAL
Sole proprietorship: Assets = Liabilities + Capital
Partnership: Assets = Liabilities + Partner’s Capital
Corporation: Assets = Liabilities + Stockholders Equity
Cooperative: Assets = Liabilities + Equity
ELEMENTS OF THE ACCOUNTING EQUATION
Assets are resources that a company owns in order to
derive some future benefits.
These assets are used by the company in its normal operations
such as the manufacture of goods or delivery of services. These
benefits are usually in the form of their ability to directly or
indirectly increase the inflow of cash to the company or
reduction of its outflows.
EXAMPLES OF ASSETS
EXAMPLES OF ASSETS:
1) CASH
-the money that is deposited in the
bank and even undeposited checks
from customers.
2) ACCOUNTS RECEIVABLE
-this represents amounts that are
collectible from customers. They arise
when a business sells its goods or
services on account or on credit.
3) INVENTORIES
-products for sale which normally held
for sale by the store in its normal
operations.
EXAMPLES OF ASSETS:
4) EQUIPMENT
-is a tangible long-term
asset that benefits a business over
several years of use. Computers,
trucks and manufacturing machinery
are all examples of equipment. They
are tangible because they have a
physical form—unlike intangible
assets (such as patents, trademarks or
copyrights) that do not.
EXAMPLES OF ASSETS:
5) LAND AND BUILDING
- These are fixed assets owned by the
company to be used in business operations.
EXAMPLES OF ASSETS:
6) INTANGIBLE ASSETS
-An intangible asset is an asset
that is not physical in nature. Goodwill,
brand recognition and
intellectual property, such as patents,
trademarks, and copyrights, are all
intangible assets. Intangible assets
exist in opposition to tangible assets,
which include land, vehicles,
equipment, and inventory.
ELEMENTS OF THE ACCOUNTING EQUATION
Liabilities are one of the claims of external parties from
the company.
-They are the debts of the company to external creditors.
These debts do not always have to be paid in money.
Some of these liabilities are in the form of obligations to
do some service or even give something.
EXAMPLES OF LIABILITIES:
1) ACCOUNTS PAYABLE
-Accounts payable (AP) is a short-term debt and a
liability on a balance sheet where a business owes
money to its vendors/suppliers that have provided
the business with goods or services on credit.
EXAMPLES OF LIABILITIES:
2) UNEARNED REVENUE
-unearned revenue is money
received by an individual or company
for a service or product that has yet to
be provided or delivered. It is recorded
on a company's balance sheet as a
liability because it represents a debt
owed to the customer.
ELEMENTS OF THE ACCOUNTING EQUATION
Equity reflects the residual claims or net assets of
the owners of a company.
-The equity meaning in accounting refers to a
company's book value, which is the difference
between liabilities and assets on the balance sheet.
This is also called the owner's equity, as it's the
value that an owner of a business has left over after
liabilities are deducted.
-Also known as Net Worth of an individual
computed as subtracting their liabilities from their
assets.
EQUITY
EQUITY has 2 sources:
1) Owner’s Capital or
Investments
2) Income from the business
operations.
CAPITAL OR EQUITY
CAPITAL or Equity represents the net
investments of the business. This means that
any contributions of the owner which increases
the assets of the business or decreases its
liabilities will increase the capital account.
Capital represents the net investments of the
investments, withdrawals by the owner are also
taken into considerations.
At the end of the accounting period, the net
profit/income or net loss of a business is also
“closed” to the capital account.
HOW TO COMPUTE NET INCOME/ NET LOSS IN BUSINESS?
A business will have net income if its revenues
exceed expenses and will have a net loss if its
revenues are less than its expenses.
BUSINESS OPERATIONS:
1) REVENUES
- A business earns revenue when it sells its
products or its services.
- Business earns revenue when it expects to
earn an economic benefits in the form of an
increase in assets such as cash or a decrease
in liabilities.
- Other terms: SALES REVENUE OR
SALES, RENT REVENUE, FEES
REVENUE, SERVICE REVENUE,
REVENUES
2) EXPENSES
Expenses are more
immediate in nature,
and you pay them on a
regular basis. They're
then shown on your
monthly income
statement to determine
your company's net
income.
2) EXPENSES
MATCHING PRINCIPLE STATES THAT NO REVENUE CAN BE EARNED
WITHOUT INCURRING CORRESPONDING EXPENDITURES. As such, when a
store sells a phone, aside from getting cash for the phone, it also incurs costs for the
goods it has sold. In barber shop, when someone gets a haircut, the barber shop incurs
costs in the form of salary for its employees.
USING THE ACCOUNTING EQUATION:
When using the Accounting Equation, one must remember the
ACCOUNTING IDENTITY means that the equality must be
maintained throughout all transactions. The reason for this is because
assets of the entity will always be claimed by another party.
In mathematics, which states that both sides of equation should be
equal to each other at all times.
As such, to maintain this identity, transactions always have dual effect
on the accounting equation. Meaning, each transaction of the entity
would have to affect at least two accounts in order for the equation to
remain in balance. Such accounts may be on the same side, that is
(+Assets & -Assets) or on both sides of the equation, that is, (+Asset
& +Equity) or (+Asset & + liability).
EXAMPLE:
ACTIVITY 6
