Fundamentals of Accountancy, Business and Management 1

Quarter 3 - Module 3:
The Accounting Equation
These are the competencies included :
 Illustrate the accounting equation (ABM_FABM11- IIIb-c-17)
 Perform operations involving simple cases with the use of accounting equation (ABM_FABM11- IIIb-c-18)
ACTIVITY:
Directions: Encircle the letter of the best answer.
1. It shows the relationship between a company’s assets, liabilities, and capital.
a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation
2. This refers to the economic resources owned by the company.
a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation
3. This refers to the property and rights owned by the business..
a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation
4. This refers to the investment of an owner.
a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation
5. These include claims of the creditors on the assets of the company.
a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation
6. This refers to the obligations to pay and debts of a company.
a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation
7. This has to show a balance in every business transaction.
a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation
8. This includes a company’s cash, supplies, and equipment.
a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation
9. This shows no changes when an owner invests additional cash in the business.
a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation
10. This demonstrates the dual aspect of a business transaction and proves that Debit = Creditl.
a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation
The Accounting Equation
Activity 2. Find the missing values.

ASSETS LIABILITIES OWNER’S EQUITY

1 250,000 150,000 100,000

2 665,000 347,000

3 234,000 434,000

4 123,000 23,000

5 876,000 500,000

6 15,000 5,999

7 1,089,021.18 396,156.93

8 68,000 66% of assets

9 1/3 of owner’s equity 143,628

10 164% of liabilities 26,007

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The accounting equation formula represents the relationship between the assets, liabilities, and owner's equity of a business. The value of a company's assets should
always equal the sum of its liabilities and owner's equity. The underlying concept of this formula is that every asset acquired by a company was financed either through
debt (liability) or through investment from owners (owner’s equity).

The accounting formula materializes a company's assets in terms of its liabilities and owner’s equity. This simple formula serves as the foundation of double-entry
bookkeeping wherein there are always two account entries made for each transaction—a debit to one account and a credit to another.

Keep reading to have a better understanding of the accounting formula basics, its elements, and its relationship to one another.

The Accounting Equation:

ASSETS= LIABILITIES + OWNER’S EQUITY
The Elements of the Accounting Equation
1. Assets - these are economic resources owned by the company expected for future gain. They are property and rights of value owned by the company.
Assets refer to items like cash, inventory, accounts receivable, buildings, land, or equipment. Purchasing something with the company’s cash on hand will not affect the
accounting equation because it's just converting one type of asset (cash) into another type of asset (inventory, equipment, or whatever else is purchased). The accounting
formula doesn't differentiate between types of assets.
2. Liabilities - these are debts or obligations, which are.amounts owed to others. These include debts, obligations to pay, and claims of the creditors on the .assets of the
company. Liabilities are one of three ways.. in which a business can acquire funding.
Liabilities can include bank loans, credit card accounts, or accounts payable (such as when a supplier offers to.. extend credit to a business).
3. Owner’s Equity - these are the total capital the owners have invested in the business. These include.the .interest of the owners on the company; claims of… the
.owners on the assets of the company; and the.investment of the owner plus or minus the results on the.operations of the company.
Owner’s Equity or capital comes from two main sources:. investment of owners and earning from the company.
Let us put into practice the accounting equation above. For example, if Company Tibs owns Php100,000 in assets but owes Php30,000 to creditors, how much would
be the total claim of the owners?
Assets = Liabilities + Owner’s Equity
Php100,000 = Php30,000 + ?
Php100,000 = Php30,000 + Php70,000
Php100,000 = Php100,000
The equity to which owners/investors have a claim is Php70,000. As you can see, the accounting formula is all about balance. Any activity on the right side is
reflected on the left side.
Here are some more examples:
1. Given liabilities of Php10,000 and the owner’s equity of Php50,000, find the value of the assets.
Assets = Liabilities + Owner’s Equity
Assets = Php10,000 + Php50,000
Assets = Php60,000
2. Given assets of Php100,000 and the owner’s equity of Php70,000, find the liabilities.
Assets = Liabilities + Owner’s Equity
Liabilities = Assets - Owner’s Equity
Liabilities = Php100,000 - Php70,000
Liabilities = Php30,000
3. Given assets of Php200,000 and liabilities of Php90,000, find the owner’s equity.
Assets = Liabilities + Owner’s Equity
Owner’s Equity = Assets - Liabilities
Owner’s Equity = Php200,000 - Php90,000
Owner’s Equity = Php110,000
Analyzing the Effects of Business Transactions to the Accounting Equation
The accounting equation shows that for every debit, there must be an equal credit. As we have already discussed, Assets, Liabilities and Owner’s Equity are the
three components of the accounting equation that make up a company’s balance sheet. Accounting Equation demonstrates the dual aspect of a business transaction and
proves that Debit = Credit. Here is a table to show you the effects of transactions on the accounting equation.
The following details will include the amount and the account affected in illustrating the effects on the accounting equation. Notice that the accounting equation is
always balanced in every transaction such that assets are always equal to liabilities and owner’s equity.

TRANSACTION ASSETS LIABILITIES OWNER’S ANALYSIS

EQUITY
1. Mr. Pacs invests cash of Increase No Change Increase The cash investment of Mr. Pacs
Php10,000 Cash Mr. Pacs, Capital increases the assets of the

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 business and the capital (owner’s
equity) of the owner.
2. Mr. Pacs invests equipment Increase No Change Increase The equipment increases the
amounting to Php100,000 Equipment Mr. Pacs, Capital assets of the business. Since this
is an investment of Mr. Pacs, her
capital correspondingly increases.
3. Renders Php5,000 services Increase No Change Increase The business earns cash by
for cash Cash Service Income rendering services. There is
increase in assets for the cash
collected and increase in capital as
revenue increases capital.
4. Purchases P1,000 supplies Increase Increase No Change Supplies increase the assets of the
on credit Supplies Accounts Payable business. Liabilities
correspondingly increase as the
supplies were bought in credit.
5. Purchases Php200,000 Increase No Change No Change Land increases the assets of the
Land paying cash Land business. Cash correspondingly
Decrease decreases with the cash paid for
Cash the purchase of land.

Activity 1. Your Turn

Give the effect of the following transactions on the accounting equation.

On August 21, 2023, Don Juancho opens Cinabon Laundry Services. On the transaction summary table below, indicate the effect of each transaction to each
account. Put “+” to signify increase or “-” to signify decrease. Indicate the amount of increase or decrease for each account. The first one is done for you.

TRANSACTION ASSETS LIABILITIES OWNER’S EQUITY

1. Don Juancho invested Php100,000 cash in the + +
business. Php100,000 Php100,000
2. Bought Php2,000 worth of supplies by cash.
3. Borrowed Php50,000 cash from Don Almabs.
4. Services rendered to client on credit worth
Php5,000
5. Cash services rendered to Ms. Rastaken,
Php10,000

ACTIVITY
Directions: Choose the corresponding answer from the word box and write it on the space provided before each number.
_______________ 1.This refers to the obligations to pay and debts of a company.
_______________ 2. This refers to the economic resources owned by the company.
_______________ 3. This has to show a balance in every business transaction.
_______________ 4. This demonstrates the dual aspect of a business transaction and proves that Debit = Credit.
_______________ 5. This refers to the property and rights owned by the business..
Assets
_______________ 6. This refers to the investment of an owner.
Decrease

Increase
_______________ 7. These include claims of the creditors on the assets No Changes
of the company.
_______________ 8. This includes a company’s cash, supplies, and equipment.
Liabilities Owner’s Equity
_______________ 9. It shows the relationship between a company’s assets, liabilities, and capital.
Balanced
_______________ 10. This shows noSheet Accounting
changes when an owner invests additionalEquation cash in the business.

Answer Key
References Post-test
BOOKS 1. Liabilities 6. Owner’s Equity
2. CONGRATULATIONS
Assets 7. Liabilities
Ong, Flocer Lao. 2016. Fundamentals of Accountancy, Business, and Management 1. Quezon City: C&E Publishing, Inc.‌
3. Stice,
Skousen, K. Fred, Earl Accounting Equation
and James FOR COMPLETING THIS MODULE!
Stice. 2000. 8. Assets Accounting. 14th ed. Vol. 1. Singapore: Thomson Learning Asia.
Intermediate
WEBSITES 4. Accounting Equation 9. Accounting Equation
5.
“Accounting FundamentalsAssets 10. Liabilities
| Chapter 1: The Accounting Equation | Top Hat.” n.d. Tophat.Com. Accessed August 2, 2020. https://bit.ly/3hF8rNx.
Activity 4.
1.Bonus
“Teacher Sheila’s Lessons Portal: FABM-1.” n.d. Teacher Sheila’s Lessons Portal. Accessed August 2, 2020. https://bit.ly/303Kp8Y.
2.Assets + 2,000 and Owner’s Equity + 2,000
3. Assets + 50,000 and Liabilities + 50,000
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4. Assets + 5,000 and Owner’s Equity + 5,000
5. Assets + 10,000 and Owner’s Equity + 10,000
Carlson, Rosemary. n.d. “What Is the Accounting Formula?” The Balance Small Business. Accessed August 2, 2020. https://bit.ly/2X3giwC.

“Accounting Equation: How Transactions Affects Accounting Equation?” 2017. IEduNote.Com. November 23, 2017. https://bit.ly/3hUUBqz.

“How Transactions Impact the Accounting Equation.” n.d. Principlesofaccounting.Com. Accessed August 2, 2020. https://bit.ly/3hJjIw6.

OTHERS

DepEd Curriculum Guide

- Fundamentals of Accountancy, Business and Management 1

DepEd Teachers Guide

- Fundamentals of Accountancy, Business and Management 1

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