BASIC ACCOUNTING EQUATION

ASSETS = LIABILITIES + CAPITAL

ASSET
• a present economic resource controlled by the entity as a result of a
past event. An economic resource is a right that has the potential to
produce economic benefits.
Essential charateristics of an asset:
1. The asset is controlled by the entity.
2. The asset is the result of a past transaction or event.
3. The asset provides future economic benefits

Note: Tangibility and ownership are not essential characteristics of

assets. Also, the presence or absence of expenditure is not necessary in
determining the existence of assets.
LIABILITY
• a present obligation of an entity arising from past transaction or event,
the settlement of which is expected to result in an outflow from the
entity of resources embodying economic benefits.
Essential charateristics of a liability:
1. The liability is the present obligation of a particular entity.
2. The liability arises from past transaction or event.
3. The settlement of the liability requires an outflow of
resources embodying economic benefits.
Note: Identification of payee and certainty of timing of settlement
and amount of liability are not essential characteristics of liabilities.
CAPITAL/ EQUITY
• the residual interest in the assets of the entity after deducting all its
liabilities.
• net asset
 BASIC ACCOUNTING EQUATION

ASSETS = LIABILITIES + CAPITAL

RESOURCES = CLAIMS (Creditor and Owner)
A=L+C L=A-C C=A-L
SAMPLE PROBLEMS
1. Ben has assets of P 500,000 and liabilities of P400,000. How much
is the capital? P 100,000 C=A-L
C = 500,000 - 400,000

2. Popoy has liabilities of P 300,000 and capital of P750,000. How

much are the assets? P 1,050,000 A=L+C
A = 300,000 + 750,000

3. Paula has assets of P 6,000,000 and capital of P2,500,000. How

much are the liabilities? P 3,500,000 L=A-C
L = 6,000,000 - 2,500,000
ITEM ASSETS LIABILITIES CAPITAL

1 750,000 350,000 ?
400,000

2 850,000 ?
100,000 750,000

3 ?
805,000 105,000 700,000
EXPANDED ACCOUNTING EQUATION

ASSETS = LIABILITES + (CAPITAL + INCOME - EXPENSE)

INCOME - is the increase in economic benefit during the accounting period in the form of an inflow
or increase of asset or decrease of liability that results in increase in equity, other than contribution
from equity participants. Simply stated, income is an inflow of future economic benefit that increases
equity, other than contribution by owners.

Income encompasses both revenue and gains.

EXPENSE - is the decrease in economic benefit during the accounting period in the form of outflow or
decrease in asset and increase in liability that results in decrease in equity, other than disctribution to
equity participants.
 ELEMENTS OF FINANCIAL STATEMENTS

- refer to the quantitative information shown in the

sta te m e nt o f f i n a n c i a l p o s i t i o n a n d sta te m e n t o f
comprehensive income.

ELEMENTS OF FINANCIAL STATEMENTS

FINANCIAL POSITION FINANCIAL PERFORMANCE
ASSET INCOME
LIABILITY EXPENSE
CAPITAL/ EQUITY
source:REO
 ASSETS = LIABILITES + CAPITAL + ( INCOME - EXPENSE)
Statement of Financial Position or Balance Sheet

Statement of Financial Performance or Income Statement

P 990,000 = P130,000 + 800,000 + ( 80,000 - 20,000)

 THE ACCOUNT
• Is the basic summary device of
accounting.
• A detailed record of the increases,
decreases and balance of each
element that appears in an entity’s
financial statements.
• A separate account is maintained for
each element that appears in the
balance sheet ( assets, liabilities and
equity) and in the income statement
( income and expenses).
• The simplest form of the account is
known as “T” account.
CHART OF ACCOUNTS
• A listing of all the accounts and their
account numbers in the ledger.
• The chart is arranged in the financial
statement order, that is assets first,
followed by liabilities, owner’s equity,
income and expenses.
• The accounts should be numbered in a
flexible manner to permit indexing and
cross-referencing.
• A c c o u n t a n t s re fe r t o t h e c h a r t o f
accounts to ide nt i f y t he pe rt i ne nt
accounts to be increased or decreased.
• If an appropriate account title is not
listed in the chart, an additional account
may be added.
Asset: a present economic resource controlled by the entity as a result of a past event. An
economic resource is a right that has the potential to produce economic benefits.

Essential charateristics of an asset:

1. The asset is controlled by the entity.
2. The asset is the result of a past transaction or event.
3. The asset provides future economic benefits

Per PAS no. 1 Assets are classified into two, namely current assets and non-current assets.

Current Assets - refer to all assets that are expected to be realized, sold or consumed within
the enterpires’s normal operating cycle. Operating cyle is the inverval of time from the date of
acquisition of merchandise inventory; sell the inventory to customers and the ultimate
collection of cash from the sale. When the normal operating cylce of the business is not
clearly identifiable, it is assumed to be twelve months.
source:fundamentals of accounting; Lopez, R.
Cash - the account title to describe money, either in paper or in coins and money substitute like check,
postal money orders, bank drafts and treasury warrants. When cash is within the premise of the
business, the account taile is Cash on Hand and Cash in Bank if deposited in the bank.
Cash Equivalents - PAS no. 7 defines cash equivalents as short-term, highly liquid instruments that are
readily convertible into cash and they present insignificant risk of changes in values because of
changes in interest rates.
Petty Cash Fund - the account title for money placed and set aside for petty or small expenses. This
exists when business used the imprest system of keeping cash.
Notes Receivable - this is a promissory note that is received by the business from the customer
arising from rendering of services, sale of merchandise, etc.
Accounts Receivable - the account title for amounts collectible arising from services rendered to a
customer or client on credit or sale of goods to customers on accounts. This constitutes an oral or
verbal promise to pay by a customer or client.
Estimated Uncollectible Accounts - this is an asset offset or a contra-asset account. It provides for possible
losses from uncollected accounts. Although this is not actually an asset, it is classified as such because it is
shown as a deduction from the Accounts Receivable which is a Current Asset Account. The difference between
accounts receivable and the related estimated uncollectible accounts is called Estimated Realizable Value.
source:fundamentals of accounting; Lopez, R.
source:fundamentals of accounting; Lopez, R.
source:fundamentals of accounting; Lopez, R.
source:fundamentals of accounting; Lopez, R.
source:fundamentals of accounting; Lopez, R.
source:fundamentals of accounting; Lopez, R.
source:fundamentals of accounting; Lopez, R.
source:fundamentals of accounting; Lopez, R.
source:fundamentals of accounting; Lopez, R.
source:fundamentals of accounting; Lopez, R.
Double-Entry System
Double-Entry System

• Accounting is based on a double-entry system which means that the dual effect of a
business transaction is recorded. Each transaction affects at least two accounts. The total
debits for a transaction must always equal to the credits.
• Account may be defined as a detailed record of the increases, decreases and the balance
of each element that appears in an entity’s financial statements
• An account is debited when an amount is entered on the left side of the account and
credited on the right side.

(Right Side)
Rules of Debit and Credit
Increase in Asset is DEBIT, decrease in ASSET is CREDIT
Increase in Liability is CREDIT, decrease in Liability is DEBIT
Increase in Equity is CREDIT, decrease in Equity is DEBIT
Increase in Income is CREDIT, decrease in Income is DEBIT
Increase in Expense is DEBIT, decrease in Expense is CREDIT
Increase in Drawing is DEBIT, decrease in Drawing is CREDIT
Rules of Debit and Credit

ASSETS = LIABILITES + CAPITAL

Debit Credit Credit

ASSETS = LIABILITES + CAPITAL + INCOME - EXPENSE - DRAWINGS (WITHDRAWAL)

D - RAWINGS L - IABILITY
E - XPENSE E - QUITY
A - ASSET R - REVENUE
 EXERCISE
( Service Concern)
TRANSACTION 1. Mr. Pablo Vasquez , CPA opened a bank account with BPI bank
in the amount of P100,000 to start with his accounting practice.

CASH P. VASQUEZ, CAPITAL

DEBIT CREDIT
DEBIT CREDIT

P 100,000 P 100,000
TRANSACTION 2: Bought office supplies on account for P 3,000.

OFFICE SUPPLIES INVENTORY ACCOUNTS PAYABLE

DEBIT CREDIT
DEBIT CREDIT

P 3,000
P 3,000
TRANSACTION 3: Received cash of P 10,000 for auditing services rendered to
clients.

CASH PROFESSIONAL INCOME

DEBIT CREDIT
DEBIT CREDIT

P 100,000
P 10,000
P 10,000
TRANSACTION 3: Received cash of P 10,000 for auditing services rendered to
clients.

CASH PROFESSIONAL INCOME

DEBIT CREDIT
DEBIT CREDIT

P 100,000
P 10,000
P 10,000
TRANSACTION 4: Mr. Pablo Vasquez withdrew cash of P 5,000 from his business.

CASH P. VASQUEZ, DRAWING

DEBIT CREDIT
DEBIT CREDIT

P 100,000 P 5,000 P 5,000

P 10,000
TRANSACTION 5: Paid salaries to audit staff, P 4,000.

CASH SALARIES EXPENSE

DEBIT CREDIT
DEBIT CREDIT

P 100,000 P 5,000 P 4,000

P 10,000 P 4,000
 ACCOUNT ENDING BALANCE ( EXAMPLE):

CASH SALARIES EXPENSE

DEBIT CREDIT
DEBIT CREDIT

P 11O,000 P 100,000 P 5,000 P 4,000

P 9,000
P 10,000 P 4,000
Ending Balances P 4,000
P 101,000
 CONTRA ACCOUNT
A contra account is a general ledger account with a balance that is opposite of the
normal balance for that account classification. The use of a contra account allows a
company to report the original amount and also report a reduction so that the net
amount will also be reported.

Example: Accumulated Depreciation

For instance, if a company has a plant asset such as Equipment with a debit balance
of $92,000 and the account Accumulated Depreciation has a credit balance of
$50,000, the carrying amount (or book value) of the equipment is $42,000.
 ADJUNCT ACCOUNT
An adjunct account is an account in financial reporting that increases the book value
of a liability account. An adjunct account is a valuation account from which credit
balances are added to another account. The concept of an adjunct account can be
contrasted with the concept of a contra account, which decreases the amount of a
liability account through a debit entry.

Example:
If a company issues bonds, the Unamortized Premium on Bonds Payable account
(sometimes simply called Bond Premium account) is an adjunct account because its
credit balance is added to the amount in the Bonds Payable account (in order to
determine the book value of the bonds). The unamortized premium and the bond
liability, when combined, represent the actual liability of the issuer.

source: https://www.investopedia.com/terms/a/adjunct-account.asp