Fundamentals of

Accountancy, Business,
and Management 1
Quarter 3 – Module 3:
The Accounting Equation
Fundamentals of Accountancy, Business and Management – Grade 11
Quarter 3 – Module 3: The Accounting Equation
First Edition, 2020

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Fundamentals of
Accountacy, Business,
and Management 1
Quarter 3 – Module 3:
The Accounting Equation

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Introductory Message
For the facilitator:
As a facilitator, you are expected to orient the learners on how to
use this module. You also need to keep track of the learners' progress
while allowing them to manage their own learning at home.
Furthermore, you are expected to encourage and assist the learners as
they do the tasks included in the module.

For the learner:

As a learner, you must learn to become responsible of your own
learning. Take time to read, understand, and perform the different
activities in the module.
As you go through the different activities of this module be
reminded of the following:
1. Use the module with care. Do not put unnecessary mark/s on any
part of the module. Use a separate sheet of paper in answering the
exercises.
2. Don’t forget to answer Let Us Try before moving on to the other
activities.
3. Read the instructions carefully before doing each task.
4. Observe honesty and integrity in doing the tasks and checking
your answers.
5. Finish the task at hand before proceeding to the next.
6. Return this module to your teacher/facilitator once you are done.

If you encounter any difficulty in answering the tasks in this module,

do not hesitate to consult your teacher or facilitator. Always bear in
mind that you are not alone. We hope that through this material, you
will experience meaningful learning and gain deep understanding of the
relevant competencies. You can do it!

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 Let Us Learn

This material was designed and written with you in mind. It is here to help
you master the topic about The Accounting Equation. This self-learning module will
help you learn meaningfully as you accomplished the different task at your own pace.

The scope of this module permits it to be used in many different learning

situations. The language used recognize the diverse vocabulary level of students. The
lessons are arranged to follow the standard sequence of the course. But the order in
which you read them can be changed to correspond with the textbook you are now
using.

After going through this module, you are expected to:

1. illustrate the accounting equation ABM_FABM11-lllb-c-17,

2. perform operations involving simple cases with the use of accounting

equation ABM_FABM11-IIIb-c-18; and

3. show the effect of the transaction in Assets, Liabilities, and Owner’s

Equity.

3
 Let Us Try

Instruction: Read carefully the statements below and identify whether this refers to
Assets, Liabilities, Owner’s Equity or Capital. Write your answer on the yellow
paper.

1. This refers to debts, obligations to pay, and claims of the creditors on the assets
of the business.

2. It is the claim of the owner plus minus the result of the operation.

3. Cash investment from the owner.

4. These are the economic resources owned by the business for future gain.

5. Accounts Payable, Loans and Mortgage

6. Land and Building

7. It is an owner’s net worth.

8. Furniture and fixtures owned by the business.

9. A wealth in the form of money or other assets owned by a person or organization

or available or contributed for a particular purpose such as starting a company
or investing a new business.

10. It is an obligation between one party and another not yet completed or paid for.

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 Lesson
The Accounting
3 Equation

Any activity or event that has a monetary value and may affect the financial
position or operation of the business is called business transaction. A financial
position or balance sheet is the report of company's assets, liabilities and owner's
equity. Balance sheet reflects the basic principle of double entry accounting system,
this shows the equality between the totals of the debit and credit accounts. The
accounting equation is stated as follows:

ASSETS = LIABILITIES + OWNER'S EQUITY

or

A = L + OE

Let’s start your journey of learning by exploring the accounting equation

presented.

Let Us Study

Diagnostic Assessment

Instruction: Determine the unknown accounting values. Write your answer on the
yellow paper.

No. Asset (P)󠅇 Liabilities (P) Owner’s Equity (P)󠅇

1 ₱234,789.00 ? ₱123,456.00
2 ₱266,000.00 0 ?
3 ? ₱455,896.00 ₱1,045,002.00
4 ₱855,007.00 ? ₱688,662.00
5 ₱255,888.00 ? ₱206,025.00
6 ? ₱149,143.00 0
7 ₱899,223.00 ₱111,846.00 ?
8 ? ₱569,055.00 ₱1,024,693.00
9 ₱45,023.00 ₱19,633.00 ?
10 ₱895,632.00 ₱147,896.00 ?

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Components of Balance Sheet:
1. Assets are economic resources owned by the business for future gain.

2. Liabilities include debts, obligations to pay, and claims of the creditors on the
assets of the business.

3. Owner's Equity or Capital includes the interest of the owner on the business
such as claims of the owner of the assets and the investment of the plus or minus
the results of operations (F. Ong, 2016)

The double-entry accounting system was formulated from the accounting

equation. It shows on a company's balance sheet whereby the total of all the
company's assets equals the sum of the company's liabilities and shareholders'
equity. The accounting equation is stated as follows:

ASSETS = LIABILITIES + OWNER'S EQUITY

or

A = L + OE
The accounting equation ensures the equilibrium balance of the balance
sheet. This shows that the debit side must be equal to the credit side of the balance
sheet. In every business transaction, the accounting equation should always be
balanced. Whenever there is a transaction, it is always analyzed in terms of the
effects on the three accounts in the balance sheet, whether to increase or decrease
its value.

Illustration 1

1. Given liabilities of ₱75,275.00 and the owner’s equity of ₱689,800.00, find the
value of assets?

Solution:
Assets = Liabilities + Owner’s Equity
= ₱75,275.00 + ₱689,800.00
= ₱765,075.00

2. Given assets of ₱300,200.00 and the owner’s equity of ₱225,500.00, find the
liabilities?

Solution:

Liabilities = Assets - Owner’s Equity

= ₱300,200.00 - ₱225,500.00

= ₱74,700.00

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3. Given assets of ₱500,000.00 and the liability of ₱100,000.00, find the value of the
owner’s equity?

Solution:

Owner’s Equity = Assets - Liabilities

= ₱500,000.00 - ₱100,000.00
= ₱400,000.00

Illustration 2

Mr. Muscle Carwash owned by Mr. Aumar Te started a new business and
completed these transactions during June, 2019.

June 04, 219 Mr. Te invested cash of ₱220,000.00 as initial investments.

June 05, 2019 Purchased equipment at ₱28,500.00 on account.

June 08, 2019 Purchased supplies to be used for the business operation.

Substituting the accounting equation with the given data:

Asset = Liabilities + Owner’s Equity

₱248,500.00 = ₱28,500.00 + ₱220,000.00

If we put the accounting equation in vertical position, it will show this manner.

ACCOUNTING EQUATION

Left (Debit Side) Equals Right (Credit Side)

Assets Cash ₱ 220,000.00 Total Liabilities ₱ 28,500.00

Equipment 28,500.00 Total Owner’s Equity 220,000.00

Total Liabilities &

Total Assets ₱ 248,500.00 Owner’s Equity ₱ 248,500.00
============= ===========

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The Rule of Debit and Credit
In a vertical position of the accounting equation, the illustration shows the
two sides of the account: left side (debit) and right side (credit). The debit side is for
the assets and the credit side is for the liabilities and owner’s equity.

Expanded Accounting Equation

According to Averkamp (2020), the accounting equation is the foundation of
the double-entry accounting system. In the double-entry accounting system, the
accounting equation does not show the whole picture, we need to expand the
equation to reflect all of its component parts.

In a sole proprietorship, the expanded accounting equation provides more

details for the owner’s equity amount. The expanded accounting equation for a sole
proprietorship is: Assets = Liabilities + Owner's Capital + Revenues – Expenses –
Owner's Draws.

The expanded accounting equation shows (1) the impact on equity for net
income by the increase and decrease of the revenue and expenses, and (2) the effect
of transactions with owner’s equity by drawing, dividends earned, sales or purchase
of ownership interest.

The double-entry system of bookkeeping is one that recognizes the two -

fold effects of the transaction; the value received and the value parted with
which has the effect of increasing or decreasing the assets, liabilities, and
owner’s equity. Because of the dual effects, the equation will always remain an
equal balance (Hayes, 2020).

An illustration shows the effect of business transaction in the accounting

elements.

Assets invested by the owner

Mr. Mercado started a furniture business on Dec. 01, 2019. The following
transactions occurred during the month of December.

Dec. 01- He invested ₱800,000.00 cash and delivery truck amounting to

₱200,000.00.

Owner’s Equity
Assets (Increase) Liabilities (No Effect)
(Increase)

Mercado, Capital
Cash ₱800,000.00 None
₱1,000,000.00

Vehicle ₱200,000.00

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Borrowing from the bank

Dec. 3 – Mercado borrowed ₱100,000.00 cash from BDO for use in his business.

Assets (Increase) Liabilities (Increase) Owner’s Equity

(No Effect)
Loans Payable Mercado, Capital
Cash ₱900,000.00 ₱100,000.00 ₱1,000,000.00

Vehicle ₱200,000.00

Purchased assets for cash

Dec. 5 – Bought electric wood cutter and electric driller from Makita and paid
₱60,000.

Assets (No Effect) Liabilities (No Effect) Owner’s Equity

(No Effect)
Loans Payable Mercado, Capital
Cash ₱840,000.00 ₱100,000.00.00 ₱1,000,000.00

Vehicle ₱200,000.00

Tools ₱ 60,000.00

Purchased assets on account

Dec. 8 – Purchase welding machine on account from Lig-On Corp. for ₱40,000.00.

Liabilities
Assets (Increase) Owner’s Equity
(Increase) (No Effect)
Loans Payable Mercado, Capital
Cash ₱840,000.00 ₱100,000.00 ₱1,000,000.00

Accounts Payable
Vehicle ₱200,000.00
₱ 40,000.00

Tools ₱ 60,000.00

Machineries ₱ 40,000.00

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Cash withdrawal by the owner

Dec. 20 – Mr. Mercado made a cash withdrawal of ₱150,000.00 for personal used.
Liabilities Owner’s Equity
Assets (Decrease)
(No Effect) (Decrease)
Loans Payable Mercado, Capital
Cash ₱690,000.00 ₱100,000.00 ₱850,000.00
Accounts Payable
Vehicle ₱200,000.00
₱ 40,000.00
Tools ₱ 60,000.00
Machineries ₱ 40,000.00

Payment of liability

Dec. 22 – The account due to Makita was paid in cash.

Liabilities Owner’s Equity (No

Assets (Decrease)
(Decrease) Effect)
Loans Payable Mercado, Capital
Cash ₱650,000.00 ₱100,000.00 ₱850,000.00
Vehicle ₱200,000.00
Tools ₱ 60,000.00
Machineries ₱ 40,000.00

The following table summarizes the effects of these transactions on the

accounting equation.

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Use the accounting equation to check its balance:

Assets = Liabilities + Owner’s Equity

₱950,000.00 = ₱100,000.00 + ₱850,000.00

Determining profit through operation

➢ Accrual basis of accounting vs Cash basis of accounting – accrual basis

recognizes revenue when earned and recognizes expenses when incurred
➢ Under the expense recognition principle, expenses can be recognized either
as: (1) matching; (2) systematic allocation, or (3) direct association
➢ Profit measures the performance of the company. If the revenue is greater than
the amount of expenses, then it is a net profit; otherwise, it is a net loss.

Received cash for revenue earned

Dec. 23 – A customer bought 1 sala set and 1 dining set in cash amounting to
₱25,000.00.

Assets (Increase) Liabilities (No Effect) Owner’s Equity (Increase)󠅇

Cash ₱ 25,000.00 Revenue ₱ 25,000.00

Revenue rendered on account

Dec. 24 – Mang Inasal purchased 10 dining sets on account amounting for

₱180,000.00.

Assets (Increase) Liabilities (No Effect) Owner’s Equity (Increase)󠅇

Accounts Receivable
₱180,000.00 Revenue ₱180,000.00

Paid expenses incurred

Dec. 27 – Paid electricity bill, ₱15,000.00.

Assets (Decrease) Liabilities (No Effect) Owner’s Equity (Decrease)

Cash (₱15,000.00) Expense (₱15,000.00)

Dec. 31 – Paid salaries for employees amounting to ₱30,000.00.

Assets (Decrease) Liabilities (No Effect) Owner’s Equity (Decrease)

Cash (₱30,000.00) Expense (₱30,000.00)

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 Based on the above illustrations, profit or income generated for the accounting
period will increase the assets and owner’s equity while on the other hand, the
expenses had the opposite effect which decreased the value of assets and owner’s
equity.

Let Us Practice

Instruction: Write your answer in a one whole sheet of paper. Discuss your answers
brief and concise.

1. Why does the accounting equation need to be balanced?

2. Differentiate basic accounting equation from the expanded accounting
equation.
3. How does the rule of debit and credit relative to accounting equation?

Rubric

Criteria Poor (2 Points) Fair (3 Points) Good (5 Points)

Shows limited
Shows nearly Shows complete
and no
complete understanding
understanding
Understanding understanding about the topics
about the
about the topics given and
topics, perhaps
given and slightly presented it
only re-copying
inconsistent. perfectly.
the given task

*Incomplete
*There is a clear
explanation and
explanation and *There is a clear
not be clearly
appropriate use of and specific
presented.
strategy, but explanation of the
*The
Communication inconsistent in said topic.
explanation
presentation. *All task explained
cannot be
*The topic discussed specifically and
understood and
completely, but not understood.
unrelated to the
specific.
task.

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 Let Us Practice More
A. Concept Check

Instruction: For each transaction, tell whether the assets, liabilities and equity will
increase (I), decrease (D) or is not affected (NE).

No. Transaction A L E

Mr. Kwan Tiu invests his personal cash in the

1 business.

Mr. Kwan Tiu withdraws business assets for

2 personal use.

3 The company receives cash from bank loans.

4 The company paid bank loans.

5 He purchases equipment in cash.

He contributes his personal truck to the

6 business.

The company purchases land by paying half in

cash and signing a note for the remaining
7 balance.

8 Mr. Kwan Tiu withdraws cash for personal use.

9 The company purchases supplies on credit.

10 The company pays salaries for his employees.

B. Problem Solving: Compute the value of assets, liabilities, and equity for the
Adventure Ads owned by Mrs. Suarez. Write your answer on the yellow paper.

1. On May 5, The Adventure Ads borrowed cash ₱500,000.00 from A+ Lending Corp.
to purchase printing machine for his business amounting to ₱120,000.00.

a. Illustrate the basic accounting equation.

2. On May 15, the company rendered printing services for ₱200,000.00 in cash and
paid ₱65,000.00 for his employee’s salary.

b. Illustrate the expanded accounting equation at the end of the accounting

period.

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 Let Us Remember

Instruction: Write your answer in your answer sheet.

1. Enumerate the components of accounting equation.

a._____________

b._____________

c._____________

2. Illustrate the basic accounting equation. ___________________

3. Illustrate the expanded accounting equation? _____________________

4. What is the debit side of the accounting equation? ____________________

5. What is the normal balance of liabilities and owner’s equity? ______________

Let Us Assess

Instruction: Choose the letter of the correct answer. Write your answer on a
separate sheet of paper.

1. How to compute the value of owner’s equity?

A. Assets + Liabilities
B. Assets – Liabilities
C. Liabilities + Assets
D. Liabilities = Assets

2. What represents the claim of the creditor over the asset of the business?
A. Accounting equation
B. assets
C. liabilities
D. owner’s equity

3. What refers to the right hand of the account?

A. debit side
B. credit side
C. debit entry
D. credit entry

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 For item numbers 4 and 5: Mr. Sikwa Te deposited ₱1,000,000.00 cash to BPI
for an investment of his new snack-inn business.

4. How much is the assets of Mr. Sikwa Te?

A. P500,000
B. P1,000,000
C. P1,500,000
D. -0-

5. How much is the value of owner’s equity?

A. ₱500,000.00
B. ₱1,000,000.00
C. ₱1,500,000.00
D. -0-

6. Which statement is correctly stated?

Statement I – If the owner has no obligation at all, the owner has the sole right
of the assets.

Statement II – Owner’s equity tells how much the claim of the creditor.

A. Statement I only
B. Statement II only
C. Both Statements I and II
D. None of the above statements.

7. If the company bought an equipment on account, what will happen to the assets?
A. increased
B. decreased
C. unbalanced
D. not affected

8. In an expanded accounting equation, the withdrawal of the owner’s capital, will

decrease the-
A. assets
B. liabilities
C. owner’s equity
D. net income

9. How to compute the net profit?

A. Assets + Liabilities
B. Assets - Liabilities
C. Revenue + Expenses
D. Revenue - Expenses

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10. If the expenditure is greater than the revenue, what will be the result of the
income statement?
A. Net Profit
B. Net Loss
C. Unbalance
D. Break-Even

Let Us Enhance

The following was taken from the records of Macasaet Company, a client of
BFCP Accounting and Auditing Firm for the first month of operation:

Assets Liabilities
Cash in Bank ₱ 80,000.00 Accounts Payable ₱ 40,000.00
Accounts Receivable 75,000.00
Office Equipment 120,000.00 Owner’s Equity
Macasaet, Capital ₱235,000.00
Total Liabilities and
Total Assets ₱ 275,000.00 Owner’s Equity ₱275,00.00
========= ========

Consider the following additional transactions:

1. 80% was collected from Accounts Receivable.

2. 50% of Accounts Payable paid.
3. Additional Cash Investment by Mr. Macasaet

Compute the following:

A. How much is the total asset?

B. How much is the total liabilities?
C. How much is the owner’s equity balance?
D. Show the accounting equation before the consideration.

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 Let Us Reflect

Self-Reflection

https://in.pinterest.com/pin/550846598155090538/

Are you familiar with this accounting quote?

Reflective Question:
1. As a student, how can you relate this quote in this new normal situation?
2. How can we apply this accounting equation in our daily lives?
3. What is your deep understanding about our lesson?
4. Does an accounting equation have a great impact in the preparation of financial
statements?

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 18
Let Us Practice More Let Us Assess
1. I NE I 1. B
2. D NE D 2. C
3. I I NE 3. B
4. D D NE 4. B
5. NE NE NE 5. B
6. I NE I 6. A
7. I I NE 7. A
8. D NE D 8. C
9. I I NE 9. D
10. D NE D 10. B
Let Us Try Let Us Study Let Us Remember
1. Liabilities 1. ₱ 111,333.00 1. a. Assets
2. Owner’s Equity 2. ₱ 266,000.00 b. Liabilities
3. Capital 3. ₱ 1,500,898.00 c. Owner’s
4. Assets 4. ₱ 166,345.00 Equity/Capital
5. Liabilities 5. ₱ 49,863.00
6. ₱ 149,143.00 2. Assets = Liabilities +
6. Assets
7. ₱ 787,377.00 Owner’s Equity/Capital
7. Onwer’s Equity
8. ₱ 1,593,748.00 3. Assets=Liabilities+
8. Assets
Owner’s Equity/Capital
9. Capital 9. ₱ 25,390.00
– Expenses – Owner’s
10. Liabilities 10. ₱ 747,736.00
Drawing
4. Assets
5. Credit Balance
Answer Key
 References

Florendo, J., Andres, C., Barrido, A. & Honorario, C. 2016. Teaching Guide for Senior
High School in Fundamentals of Accountancy, Business and Management 1.
Philippines: Commission on Higher Education
Lopez, R. 2016. Fundamentals of Accountancy, Business and Management 1 (1st
Edition). Philippines: MS LOPEZ Prinitng & Publishing
Ong, F. 2016. Fundamentals of Accountancy, Business and Management 1.
Philippines: C & E Publishing, Inc.
Tugas, F., Salendrez, H. & Rabo S. 2016. Fundamentals of Accountancy, Business
and Management 1. Philippines: VibalGroup , Inc.

Websites:
Averkamp, H. 2020.Accounting equation. What is the expanded accounting
equation.Retrieved from https://www.accountingcoach.com/blog/expanded-
accounting-equation. Retried on July 28, 2020
Financial accounting. The basic accounting equation, Fundamentals of accounting
equation. Retrieved from https://courses.lumenlearning.com/sac-
finaccounting/chapter/the-basic-accounting-equation/. Retrieved on July 28,
2020
Hayes, A. 2020.Corporate finance and accounting.Double entry definition. Retrieved
from https://www.accountingcoach.com/blog/expanded-accounting-equation.
Retried on July 28, 2020

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For inquiries or feedback, please write or call:

Department of Education – Region XI

F. Torres St., Davao City

Telefax:

Email Address: [email protected]

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