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Accounting Equation

Chapter 3 discusses the accounting equation, which is a fundamental principle in accounting stating that Assets equal Liabilities plus Equity. It explains the limitations of the equation, the definitions and types of assets and liabilities, and the concept of equity as it relates to shareholders. The chapter also covers normal account balances and the use of T-accounts in double-entry bookkeeping.

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Daniela Alyna Amor Moquiring
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8 views4 pages

Accounting Equation

Chapter 3 discusses the accounting equation, which is a fundamental principle in accounting stating that Assets equal Liabilities plus Equity. It explains the limitations of the equation, the definitions and types of assets and liabilities, and the concept of equity as it relates to shareholders. The chapter also covers normal account balances and the use of T-accounts in double-entry bookkeeping.

Uploaded by

Daniela Alyna Amor Moquiring
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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CHAPTER 3:

ACCOUNTING EQUATION
ACCOUNTING EQUATION - is the BASIC TOOL FOR ACCOUNTING
where the left side of the equation shows the resources owned by the
business (Assets) and the right side of the equation shows the
resources that are applied to the business by the outside creditors
(Liabilities) and the owners (puhonan ng may ari).
ASSETS = LIABILITIES + EQUITY
THE EXPANDED ACCOUNTING EQUATION
ASSETS = LIABILITIES + (EQUITY + REVENUE - EXPENSES)

LIMITITAION OF ACCOUNTING EQUATION


- THE ACCOUNTING EQUATION does not ensure that
reported financial information is correct – only that it follows
certain rules regarding how information is to be recorded
within an ACCOUNTING SYSTEM.
- THE ACCOUNTING EQUATION only provides the
underlying structure for how a balances sheet is devised.
TRIVIA
AL – KHWARIZMI – “FATHER OF ALGEBRA” “Book of Addition and
Subtraction According to The Hindu Calculation”.

ASSETS - Is defined as a resource that is owned or controlled


by company that can be used to provide a future economic
benefit.
- Are items that a company uses to generate future
revenues or maintain its operation.
TYPES OF ASSETS
- PHYSICAL EXISTENCE (Tangible Assets & Intangible
assets)
CHAPTER 3:
ACCOUNTING EQUATION
 Tangible Assets are the ones that can be
seen or touched like building, plant,
machinery, vehicles, inventory, etc.
 Intangible assets are the ones that cannot be
seen or touched like goodwill, patent etc.
- CAPACITY TO GET CONVERTED INTO CASH (Current &
non-current Assets)
 Current Assets in accounting (if maturing in
12 months from the reporting date) (ex.
Cash, acc. Receivable, notes receivables
prepaid Expenses Merchandise Inventories)
or
 Non-current Assets (if maturing beyond 12
months from the reporting date). (ex. land,
building, machineries, office equipment
leasehold improvement)
LIABILITIES – Are obligations or debts owned by an entity to
external parties, often involving the repayment of funds or
providing goods or service in the future.

TYPES OF LIABILITIES
- CURRENT LIABILITIES
Short term Or Current Liabilities are those payable
within one year (next 12 months) from when the
company receives the economic benefit. (ex. Acc.
Payable, notes payable, accrued expenses, wages
payable, unearned income, currently maturing portion
of long-term debt)
- Non-current Liabilities
Long term or Non-current Liabilities Are those
payable over longer than one year. (ex. Mortgage
payable, loan payable, bonds payable)
CHAPTER 3:
ACCOUNTING EQUATION
EQUITY(Shareholders fund, capital, net assets and net worth)
- Represent the shareholders stake in the company,
identified on a company’s balance sheets.
- Represent the value that would be returned to a
company’s shareholders if all of the assets were
liquidated and all of the company’s debts were paid
off.
TYPES OF EQUITY
TYPE OF BUSINESS
 SOLE PROPRIETORSHIP (owner’s equity)
Capital – beginning balance xxx
Add: Additional Investment xxx
Net income or xxx xxx
Total xxx
Less: Drawing xxx
Net loss xxx (xxx)
Capital – ending balance xxx
 PARTNERSHIP (partnership equity)
 CORPORATION (stockholders’ equity)
NORMAL BALANCES OF ACCOUNTS
The NORMAL BALANCE is the expected balance each
account type maintains, which is the side that increases. (Assets
= debit, Liabilities = credit, Capital = credit, revenue = credit,
Expenses debit)
The T-ACCOUNT is an informal term for a set of
financial records that uses double entry book keeping.
CHAPTER 3:
ACCOUNTING EQUATION

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