ACCOUNTING

EQUATION
Prepared by: JACKIE LYNN G.
MEDIANTE,LPT
INTRODUCTION:
The accounting equation is considered to be
the foundation of the double- entry
accounting system. On a company's balance
sheet, it shows that a company's total
assets are equal to the sum of the
company’s liabilities and shareholders'
equity. Based on this double-entry system,
the accounting equation ensures that the
balance sheet remains “balanced,” and each
entry made on the debit side should have a
ACCOUNTING EQUATION:

ASSETS = LIABILITIES + OWNER’S

EQUITY
 MAJOR ACCOUNTS: DEFINITION,
CLASSIFICATION AND EXAMPLES
Major Accounts in accounting are assets, liabilities and
owner’s equity.
1. Assets – are resources controlled by the business as
a result of past transactions and events and from
which future economic benefits are expected to flow
to the business.
- These are anything of value that is owned by the
business.
 MAJOR ACCOUNTS: DEFINITION,
CLASSIFICATION AND EXAMPLES
Classification of Assets:
Current Assets & Non-current Assets

Current Assets- are those reasonably expected to be

realized in cash within one year from the reporting date
or the normal operating cycle, whichever is longer. If it
exceeds a year then that is non-current assets.
 MAJOR ACCOUNTS: DEFINITION,
CLASSIFICATION AND EXAMPLES
Operating Cycle- is the average time it takes the
business to turn the cash used in the business to cash
received from selling goods or rendering services.
 EXAMPLES OF ASSET ACCOUNTS:
1. Cash- this includes cash on Hand (bills, coins, checks, money orders
or bank drafts), cash deposited in bank (savings account or checking
account) and cash fund (petty cash fund, or payroll fund) which are
unrestricted in use.
2. Accounts Receivables – this refers to open accounts which represents
the amount of money owed by the customers to the business. This
arises from the business rendering services or selling goods to
customers.
3. Notes Receivables – this represents the amount of money owed by
the customer or debtor to the business evidenced by a promissory
note. A promissory not is a written and signed promise to pay by the
maker to the payee a sum of certain money on demand at a specified
future date.
 EXAMPLES OF ASSET ACCOUNTS:
4. Inventories – this represents assets held for sale in the
ordinary course of business, in the process of production for sale
or in the form of materials or supplies.
5. Unused Supplies – this represents supplies which remain
unused at the end of the accounting period.
6. Prepaid Rent – this refers to an advance payment made by
the business to cover for future rental payments.
7. Equipment – this represents manual or automated machines
used in the business and they include photocopying equipment,
computers, laptops, delivery vehicles and van.
8. Furniture and Fixtures – this represents assets such as tables, chairs,
filing cabinets and display racks.
9. Building – this refers to the physical structure owned and used by the
business to conduct its business operation.
10. Land – this refers to the physical site owned by the business where
the building is situated.
11. Allowance for Doubtful Accounts – this is a contra-asset or a
valuation account which refers to the portion of accounts receivable
that is estimated to be uncollectible at the end of accounting period.
12. Accumulated Depreciation – this is a contra-asset or a valuation
account which refers to the aggregate portion of the total cost of
property, plant and equipment that has been charged to depreciation
expense.
 LIABILITIES
- are present obligations of any entity arising from past
transactions or events, the settlement of which is expected to
result in an outflow from the business of resources embodying
economic benefits.
- this are what the business owes.
This is classified into 2:
Current Liabilities – are those reasonably expected to be
settled by payment within a normal operating cycle.
Non-current Liabilities – expected to be settled or to be paid
cash beyond one year.
 Examples of liability accounts:
1. Accounts Payable – refers to open accounts which represent the
amount of money owed by the business to creditors or suppliers.
2. Notes Payable – represents the amount of money owed by the
business to the supplier or creditor evidenced by a promissory note.
3. Loan Payable – represents the amount of money borrowed by the
business from third party creditors.
4. Mortgage Payable – represents the amount of money , borrowed by
the business from a bank or a lending institution which is secured by
collateral.
5. Unearned Revenue – represents cash collected by the business in
advance for a service or good that is yet to be rendered to delivered.
 REVENUE
- are the earnings arising from the main line of operations of the
business. Revenues result from rendering of services or selling goods.
Examples of revenue accounts include:
1. Service Revenue – refers to the earnings made by any business that is
into rendering services. The term “revenue” is used and not “income”
to distinguish that such an earning arises from the main line of
operations of the business.
2. Interest Income – represents interests credited by the bank to the
account of the business arising from bank deposits.
3. Sales – this represents the earnings made by any business that is into
selling goods or merchandise.
REVENUE
4. Professional Fees – represents earnings made
by professionals or experts from rendering
services to their clients. Professional include
lawyers, doctors, and certified public accountants
among the others.
 EXPENSES

- are the costs being incurred by the business in generating revenues.

Expenses include the payment of taxes and licenses, salaries among the
others.
Examples of cost and expenses accounts:
1. Utilities Expense – refers to costs associated with the usage of
electricity, water, and communication for a particular accounting
period.
2. Salaries Expense – refers to costs incurred associated with the
services rendered normally by permanent and full-time employees
who are paid on a regular basis, usually monthly.
3. Water Expense – refers to costs incurred associated with the services
rendered normally by contractual and temporary employees and
 EXPENSES

4. Taxes and Licenses – represents the costs incurred to

register the business, to acquire the right to operate and
to settle taxes.
5. Cost of Sales – refers to the cost of merchandise or
goods that were sold during a particular accounting
period.
6. Supplies Expense – refers to the amount of supplies
that was used during particular accounting period.
 EXPENSES

7. Doubtful Accounts Expense – refers to the amount of

accounts receivable that is estimated as uncollectible and
is recognized and is recognized as an expense in the
current accounting period.
8. Depreciation Expense – refers to the allocated portion
of the cost of property plant and equipment charged to
expense in the current accounting period.