TOPIC LEARNING OUTCOMES:

TOPIC # 3: Identify the major accounts in applying the

accounting equation to account for the values of
THE financial statement items.

ACCOUNTING
EQUATION

READING ASSIGNMENT:
Financial Accounting and Reporting
Fundamentals by Zeus B. Millan: Pages 68-84

Note: While reading Chapter 3, draft out your personal summary notes on your notebook. Your instructor
highly encourages that you use illustrations, diagrams, tables and the like. Be creative! These personal
summary notes will become extremely useful by the time you reach your final year in the Accountancy
program and during your formal review for the CPA Licensure Examination, so make sure to give your
best in simplifying what you can! 

LECTURE NOTES

Example #1:
At the beginning of the year, the condensed Balance Sheet of Lucia’s Corner showed the following:
Current Assets P 230,000
Noncurrent Assets P 980,000
Current Liabilities P 150,000
Noncurrent Liabilities P 420,000

To compute for the total equity:

Example #2:
At the beginning of the year, Joan Constantino Company’s condensed Balance Sheet showed the following:
Current Assets P 230,000
Noncurrent Assets P 980,000
Current Liabilities P 150,000
Noncurrent Liabilities P 420,000
During the year, total assets increased by 10% while total liabilities decreased by 20%.

To compute for the total equity:

 CONCEPTUAL PORTFOLIO

Practice solving the following problems using the accounting equation. Show your solution and analysis
of the problem for future reference.

Entity A had total assets, liabilities, and equity of ₱130M, ₱80M and ₱50M, respectively, at the beginning of
the period. During the period, Entity A’s total liabilities decreased by ₱20M, while its profit was ₱25M. There
were no other transactions or events that affected equity during the period. How much is Entity A’s ending
total assets?

Entity A had total assets, liabilities, and equity of ₱150M, ₱90M and ₱60M, respectively, at the beginning of
the period. During the period, Entity A’s total liabilities decreased to ₱40M, while its profit was ₱25M. There
were no other transactions or events that affected equity during the period. How much is Entity A’s ending
total assets?

Entity A had total assets of ₱120M and total liabilities of ₱80M at the beginning of the period. If at the end of
the period, total assets increased by ₱30M, while total liabilities remained the same, Entity A’s total equity at
the end of the period would be

Entity A had total assets and total liabilities of ₱120M and ₱85M, respectively, at the beginning of the period.
During the period, Entity A earned total income of ₱60 and incurred total expenses of ₱45. How much is
Entity A’s ending total equity?

Entity A had total assets and total liabilities of ₱150M and ₱80M, respectively, at the beginning of the period.
During the period, Entity A earned total income of ₱60 and incurred total expenses of ₱40. Entity A’s total
assets decreased to ₱130M by year-end. There were no additional contributions by, or distributions to, the
owner during the period. How much is Entity A’s ending total liabilities?

Entity A has ending total assets of ₱90M and ending total liabilities of ₱60M. Entity A had a beginning equity
of ₱10M. If Entity A earned total income of ₱45M during the year, how much were the total expenses?

Entity A has ending total assets of ₱150M and ending total liabilities of ₱90M. Entity A had a beginning
equity of ₱30M. If Entity A incurred total expenses of ₱50M during the year, how much was the total income?

At year-end, Entity A’s total assets and total liabilities are ₱190M and ₱70M, respectively. If Entity A had a
beginning equity of ₱145M and there were no contributions from, or distributions to, the owner during the
period, how much profit (loss) did Entity A earn (incur) during the year?
 TOPIC LEARNING OUTCOMES:

TOPIC # 4: Identify the major accounts in applying the

accounting equation to account for the values of
TYPES OF financial statement items.

MAJOR
ACCOUNTS

READING ASSIGNMENT:
Financial Accounting and Reporting
Fundamentals by Zeus B. Millan: Pages 104-125

Note: While reading Chapter 4, draft out your personal summary notes on your notebook. Your instructor
highly encourages that you use illustrations, diagrams, tables and the like. Be creative! These personal
summary notes will become extremely useful by the time you reach your final year in the Accountancy
program and during your formal review for the CPA Licensure Examination, so make sure to give your
best in simplifying what you can! 

LECTURE NOTES

ASSET - according to the New Conceptual Framework, it is a present economic resource controlled by the
entity as a result of past events. An economic resource is a right that has the potential to produce economic
benefits.
 Cash – money or its equivalent; short-term, highly-liquid asset that is available for unrestricted use
 Short-term Investments – temporary investments that will mature in less than a year
 Accounts Receivable - a right to receive an amount as the result of delivering goods or services on
credit; an oral or informal promise
 Allowance for Bad Debts/ Allowance for Doubtful Accounts – a contra-AR account; estimated losses
from uncollectible AR
Note: AR - ABD = Net Realizable Value of AR
CURRENT

 Notes Receivable – a right to receive an amount, supported by written or formal promise to pay
(promissory note) *short-term or long-term*
 Prepaid Expenses – the cost of an asset that is paid in advance and remains unused
Note: When used up, an adjusting entry is made to record the expensed portion.
 Prepaid Office Supplies
 Prepaid Rent
 Prepaid Insurance
 Inventory - cost of goods that have been purchased or manufactured and have not yet been sold
 Merchandising entity -Merchandise Inventory
  Manufacturing entity -Raw Materials Inventory
-Work in Process Inventory
-Finished Goods Inventory

 Long-term investments - investments that will mature in more than a year

 Long-term Notes Receivable
 Property, Plant & Equipment
 Land - cost of land used in a business. Since land is assumed to last indefinitely, the cost of
NON-CURRENT

land is not depreciated

 Building - cost of the building acquired/constructed for use in the business. The cost of
buildings will be depreciated over their useful lives
 Equipment - cost of the machinery and equipment used in the business. The cost of
equipment will be depreciated over the equipment's useful life
 Vehicles - cost of trucks, trailers, and automobiles used in the business. The cost of vehicles is
to be depreciated over the vehicles' useful lives
 Accumulated Depreciation – the total amount of depreciation expense recognized since the long-
term, depreciable asset was acquired/made available for use

LIABILITIES - A present obligation of the entity to transfer an economic resource as a result of past events.
An obligation is a duty of responsibility that the entity has no practical ability to avoid.
 Accounts Payable – an oral or informal promise to pay made by the entity
 Notes Payable – a written or formal promise to pay made by the entity (promissory note)
 Loans Payable – an arrangement under which the owner of property (usually, cash) allows another
party to use the property for a period of time in exchange for an interest payment, and the return of
the property at the end of the
arrangement. Evidenced by a promissory note
Note: interest arises due to the passage of time
 Accrued Expenses – expenses that are already incurred, but not yet paid:
 Interest Payable – interest incurred, but not yet paid; arises from interest-bearing liabilities
 Salaries Payable – salaries already earned by the employees, but is not yet paid by the business
 Utilities Payable – a single account used for the use of electricity, water, etc., but is not yet
paid by the business
 Unearned Income – the business has already received payment (in advance), but has not yet rendered
the service/ delivered the goods

EQUITY - the residual interest in the assets of an entity after deducting all the liabilities.
 *name of entity*, Capital – increased by investments or contributions made by the owner, and the
PARTNERSHIP

profit earned by the business. Decreased by withdrawals by the owner, and the loss incurred by the
SOLE PROP/

business
 *name of entity*, Drawings – used to record the temporary withdrawals by the owner. At the end of
the period, any balance in this account is closed directly to the Owner’s Capital account

 Ordinary/Common Share Capital – the par value of shares issued to the investors of a corporation
 Preference Share Capital – the par value of preferred shares issued to investors. Preferred shares are
CORPORATION

the class of shares that promise the holder a fixed dividend, and whose payment takes priority over
that of common/ordinary share dividends
 Share Premium – an account that accumulates any excess payment made by investors over the par value
of shares
 Retained Earnings – an account that accumulates the net income/loss of a corporation. Decreased
by the distribution of dividends to shareholders

INCOME – According to the New Conceptual Framework, these are:

 increases in assets, or
 decreases in liabilities;
that ultimately result in increases in equity, other than those relating to the contributions from holders of
equity claims.
 Income encompasses both revenues and gains.

 Service fees – revenues earned from rendering services

 Sales – revenues earned from the sale of goods or inventory
 Interest income – revenues earned due to the passage of time by issuing receivables that bear interest
 Gains - income which may or may not arise from the ordinary course of business
- Income earned from the sale of assets other than inventory at a higher price
- From enhancements of assets
- Decreases in liabilities that are not classified as revenue

EXPENSES – According to the New Conceptual Framework, these are:

 decreases in assets, or
 increases in liabilities;
that ultimately result in decreases in equity, other than those relating to the distributions to holders of equity
claims.
Related forms of expenses are costs and losses.
 Cost of Sales/Cost of Goods Sold – the value of inventories sold
 Freight-in – the cost incurred to purchase assets. This is a cost, and forms part of the cost of the related
purchased asset.
 Freight-out/Delivery Expense/Transportation-Out/Carriage Outwards – The cost of delivering
goods or inventory to customers. This is an expense, and forms part of an entity’s Operating Expenses.
 Transportation Expense – necessary and ordinary cost of employees transporting from one workplace
to another; and is reimbursable
 Travel Expense – costs incurred when travelling on business trips
 Utilities Expense – a single account usually used by businesses to represent the expenses incurred for
electricity, water, etc.
 Salaries Expense – payment for salaries earned by employees for their services rendered during the
period
 Rent Expense – represents rentals used up during the period
 Supplies Expense - represents the cost of supplies used up during the period
 Bad Debts Expense – the amount of estimated losses from receivables which are expected to be
uncollectible
 Depreciation Expense – the portion of the cost of the depreciable asset that has been diminished
 Insurance Expense – the cost of insurance spent for the accounting period
 Advertising Expense – the cost of promotional or marketing activities
 Taxes and Licenses
 Income Tax Expense for Partnerships & Corporations
 Interest Expense/Finance Costs/Borrowing Costs – the cost of borrowing money (due to passage of
time)
 Miscellaneous Expense – various small expenditures which do not warrant separate presentation
 Losses – expenses which may or may not arise from the ordinary course of business
- The loss incurred from selling an asset other than inventory at a price lower than its carrying
amount
- Decreases in the value of assets due to damage, obsolescence, etc.
- Losses from fire, earthquake, or other acts of God
- Decreases in the value of foreign currencies held due to changes in exchange rates

Refer to the legend below:

A = Assets
L = Liabilities
C = Capital a.k.a. Equity
D = Drawings a.k.a. Withdrawals
I = Income
E = Expenses
 CONCEPTUAL PORTFOLIO
Indicate the classifications of the accounts listed below as either: Asset, Liability, Equity, Income or Expense
account under Column A and as either a Balance Sheet or Income Statement account under Column B.
Account Titles Column A Column B
1. Accounts receivable
2. Bad debts expense
3. Building
4. Notes payable
5. Rent expense
6. Owner’s equity
7. Interest income
8. Cash
9. Gain
10. Computer equipment
11. Depreciation
12. Utilities payable
13. Freight out
14. Rent income
15. Unearned income
16. Taxes and licenses
17. Furniture and fixtures
18. Supplies expense
19. Interest expense
20. Inventory
21. Land
22. Accounts payable
23. Notes receivable
24. Prepaid insurance
25. Loss
26. Prepaid supplies
27. Rent payable
28. Sales
29. Interest receivable
30. Transportation equipment