Fundamentals of

Accountancy,
Business and
Management 1
Quarter 3 – LAS 3

Prepared by:
Mary Mildred P. De Jesus
Subject Teacher
OPENING
PRAYER
MELCS:
1. The learners illustrate the accounting
equation
2. The learners perform operations
involving simple cases with the use of
accounting equation
ABM_FABM11-IIIb-c-17-18
OBJECTIVES:
1. Identify what is Accounting Equation.
2. Classify elements of Accounting equation.
3. Illustration of the effects of the transaction in
the accounting elements.
EXPECTATIONS:
The information below will help you be a successful
participant in this course.
How is the course designed?
 Lectures

 Video Lectures
 Worksheets
 Activity Game
 Exercises
 Quizzes
ACCOUNTING
EQUATION
 BASIC ACCOUNTING EQUATION
The equation has two elements which
equally divide the entity into two parts.
The left side of the equation represents
what the entity owns. On the other
hand, the right side represents those
that the company owes.
ASSETS = LIABILITIES + CAPITAL
 ASSETS - is something of value the company
owns.
LIABILITIES – are your present obligations that
have resulted from past events and can require
you to give up resources when settling them.
 EQUITY – is simply assets minus liabilities.
Other terms for equity are “capital”, “net assets,”
and “net worth.

 Just like in any equation, the two sides of the

equation should always be balanced.
 “What the company owns should always equal
what it owes to its owners.
ELEMENTS OF THE ACCOUNTING EQUATION

1. ASSETS – are resources that an entity owns in

order to derive some future benefit. These assets
are used by the company in its normal operations
such as the manufacture of goods or delivery of
services.
 The main feature of these assets is their capability
to give benefits to the entity.
 These benefits are usually in the form of their
ability to directly or indirectly increase the inflow
of cash to the entity or a reduction of its outflows
 Some examples of assets are the following:

a. Cash – It is the money that we use comprising of the

bills and coins we use in our everyday lives in order to
buy the goods that we want and also avail the services
that we need.
b. Accounts Receivables – This represents the amount
that are collectibles from customers. They arise when a
business sell its goods or services on account or on
credit.
c. Inventories – It is the term for the goods available
for sale and raw materials used to produce goods
available for sale.
 Some examples of assets are the following:
c. Inventories
• It represents one of the most important assets of the
business because the turnover of inventory represents one
of the primary sources of revenue generation and
subsequent earnings for the company’s shareholders.
d. Equipment – It is a typed of fixed asset used by a
company in its business operations and reported on the
long term assets section of the balance sheet under the line
item, property, plant and equipment.
e. Land and Building – Is a fixed asset, owned by the
company so that they can use them for their business to
operate normally.
 Some examples of assets are the following:

f. Intangible assets – are assets that do not have a

physical existence. Example.
Goodwill
Patents
Brand
Copyrights
Trademarks
Permits
Corporate intellectual property
 ELEMENTS OF THE ACCOUNTING EQUATION

2. LIABILITIES – are one of the claims of external

parties from the entity. Basically, they are the debts
of the entity to external creditors. These debts do
not always have to be paid in money.
Types of Liabilities:
a. Accounts Payable – is generated when a company
purchase a goods or services from its suppliers on credit.
 Accounts payable is expected to be paid off within a
year’s time, or within one operating cycle.
 It is a current liabilities.
 Types of Liabilities:

b. Notes Payable – It is a formal written

promises to pay definite sums of money owed
at specified times.
c. Unearned Revenue– a liability created
when customers pay in advance for products
or services that have not been delivered or
rendered. Ex. Prepaid load.
ELEMENTS OF THE ACCOUNTING EQUATION

3. EQUITY – as the proportion of the total

value of a company’s assets that can be
claimed by it’s the owners Sole proprietorship
or partnership) and by its shareholders
(corporation).
 This is also why the “net worth” of individuals
is computed by subtracting their liabilities
from their assets.
Assets – Liabilities = Equity
 Accounting Equation example:
1. Assets = 1,700 Liability = ? Equity = 700

2. Assets = 9,000 Liability = 5,000 Equity = ?

3. Assets = ? Liability = 3,450 Equity = 6,970

 Generally equity comes from two sources.

a. The first one comes directly from the owners in

the form of investments of capital.
b. The other comes from the income of the business
from its normal operations.
 The net income or net loss of the business from its
operations can be determined by using the
following equations:
REVENUES – EXPENSES = NET
INCOME/NET LOSS
3) Capital/Equity
• The capital account of the equity represents the
net investments of the business. This means that
any contribution of the owner which increases the
assets of the business or decreases its liabilities will
increase the capital account.
• Owners contribute cash to start up a business,
an owner may even be contribute equipment, land,
building to increase his or her capital.
• When owners gets cash from the business
(withdrawals) to use for its personal use, its capital
account are deducted.
• At the end of each accounting period, the net
profit or net loss of a business is also “closed” to
this account.
 USING THE ACCOUNTING EQUATION:
The identity property in mathematics which states
that both sides of an equation should be equal to
each other at all times.
 Transactions always have a dual effect on the
accounting equation.
Let’s Illustrate!
Illustration of the effects of the transaction in the
accounting elements.
Illustration:(A) Assuming that you decided to
put up barbecue business and have
estimated that you will be needing ₱2,000 as
start – up capital.
In order to begin the business, you need to
use your savings in your piggy bank, which
you have been saving for quite some time.
You only have ₱1,500.
Let’s Illustrate!
Illustration of the effects of the transaction in the
accounting elements.
Assets = Liabilities + Equity
Cash     M. de Jesus,
Capital
P 1,500 P 1,500
 (b) Your money is not enough for the business so you
decided to talked to your Older sister if she can lend you
P500 and promise her to pay once you have your income.
She agreed to your proposal and she gave you P500 for
your business.
 At of this point, your accounting equation is as
follows:
Let’s Illustrate!
Illustration of the effects of the transaction in the
accounting elements.
Assets = Liabilities + Equity
Cash    Accounts   M. de Jesus,
Payable Capital
P 1,500       P 1,500
500   P500

P2,000 = P500 + P 1,500

Let’s Illustrate!
Illustration of the effects of the transaction in the
accounting elements.
Notes:

Your total assets are now ₱2,000 – the total

amount of resources that you control ₱1,500 from
Mr. Piggy bank plus ₱500 from your sister.
On your total assets of ₱2,000
 ₱500 represents your liability, the amount you
are obligated to pay to your sister in the future.
 ₱1,500 represents your equity
(i.e. ₱2,000 assets – ₱500 liabilities)
Notice: “that from Piggy to Sister, the accounting
equation remains balanced.
The equality of the accounting equation must be
maintained in all the accounting process of recording,
classifying and summarizing. If the accounting
equation doesn’t balance, there is something wrong”.
ILLUSTRATION 1:
A. Assets invested by the owner

 April 1 - Jun Reyes started a delivery service on

April 1, 2020. The following transactions occurred
during the month of April. He invested P800,000 cash
and Cars amounting to P600,000.
B. Borrow from the Bank
 April 2 – Mr. Reyes loan from BDO
Bank P500,000 cash

As you notice the total amount in cash increase because of additional investment
made by the owner.
As you notice the total amount in cash increase because of additional investment
made by the owner.
C. Asset purchased on credit
 April 8 – Purchased computer
equipment to Computer
Warehouse P80,000 on credit.

As you notice the assets and liability column add another account.
As you notice the assets and liability column add another
account.
D. Asset purchased on cash
April 15 – Bought furniture’s
from Home Depot and paid
P50,000 on cash.
*As you notice the total amount in cash decrease because
of the purchase on cash.
E. Owner’s withdrawal
April 24 – Mr. Reyes made a
cash withdrawal of P25,000
for personal use.
*As you notice the total amount in cash decrease again
because of the withdrawal of the owner and also in
Equity column you will see that the owner’s drawing the
amount is in negative sign meaning it is a deduction.
F. Payment of Liability
April 28 – The account due to
Computer Warehouse was paid
in cash.
As you notice the total amount in cash decreases again
because of the payment of Computer Equipment to
Computer Warehouse and as you see the Liabilities
Column the accounts payable already gone because of
the payment.
 The following table summarizes the effects of these
transactions on the accounting equation.

*Note: As you see the amount of Assets is equal to the Liabilities + Owner’s Equity.
G. Rendered service on cash
April 28 – Customer avail service
of Mr. Reyes and paid cash
amounting to P15,000.
As you notice the total amount in cash increases again
because of the payment of customer to on cash and the
Equity column also increases because there is a
recognized in the income.
H. Mr. Reyes paid utilities for the
month.
April 30 – The owner paid
electricity, water bills for the
month they consumed total of
P27,500.
 As you notice the total amount in cash decreases again
because of the payment of utilities. Equity column also
decreases because there is a recognized in the expense.
 The following table summarizes the effects of these
transactions on the accounting equation.

*Note: As you see the amount of Assets is equal to the Liabilities + Owner’s Equity.
 REFERENCES:
 Accounting Theory (n.d.) Retrieved from ttp://accountingtheory.weebly.
com/nature-and-scope-of—accounting • Andres, C.S., et al.(2016) ‖Teaching Guide
for Senior High School Fundamentals of Accountancy, Business and Management
1‖ – Published by Commission on Higher Education in collaboration with the
Philippine Normal University
 Ferrer R.C. et.al. (2017). Fundamentals of Accountancy, Business and
Management part 1, Bandolin Enterprise, (Publishing and Printing) Bakakeng Sur,
Baguio City
 Rabo, Joy S. et.al. (2019). Fundamentals of Accountancy, Business and
Management 1 (K to 12 Revised Edition), Vibal Publishing, Manila
 Valencia, E. and Roxas, G. (2009). Basic Accounting, 3rd ed. Valencia Education
Supply
 Valix, Conrado T. et.al. (2015). Financial Accounting, Vol. 1, First part. GIC
Enterprises & Co. Inc • Weygandt, J. et. al. (2012) Accounting Principles 10th ed.
John Wiley & Sons (Asia) Pte. Ltd.
 Commission on Higher Education. (2016). Teaching Guide for Senior High
School FUNDAMENTALS OF ACCOUNTANCY, BUSINESS, AND MANAGEMENT 1.
4th Floor, Commission on Higher Education, C.P. Garcia Ave., Diliman, Quezon
City. Commission on Higher Education.
“There are no secrets to
success. It is the result
of preparation, hard
work and learning from
failure”.

-Colin Powell,
statesman & 4-star
general-