John V. Balanquit

Objectives
Student will be able to :
• Discuss the accounting equation
• Summarize the relationship of the elements of the accounting equation
• Derive the value of accounting elements using the accounting equation

The Basic Accounting Equation
ASSETS = LIABILITIES + EQUITY
How can the liabilities be derived?
How can the equity be derived?

The Basic Accounting Equation
Illustration 1:
A business started by P100,000 coming from the owner and P50,000 borrowed from the bank. How much is the total assets of the business?

The Basic Accounting Equation
Illustration 2:
The business has total assets of P350,000, of which, P120,000 was from bank loans. How much is the equity of the business?

The Basic Accounting Equation
Illustration 3:
If the business has total assets of P450,000 and the claims of the owners amount to
P200,000, how much is the liabilities of the business?

Let’s have a one minute break so that we can absorb the concepts of the previous topic.

The Expanded Equation
ASSETS = LIABILITIES + EQUITY
Where:
Equity = Capital – Withdrawal
+ Income - Expenses

The Expanded Equation
Therefore:
A = L + C – W + I – Ex
Where:
A = Assets W = Withdrawals
L = Liabilities I = Income
C = Capital Ex = Expenses

The Expanded Equation
If A = L + C – W + I – Ex,
How can we solve for C?
How can we solve for W?
How can we solve for I?
How can we solve for Ex?

The Expanded Equation
Illustration 1:
The business has total assets of P200,000 and liabilities of P30,000. If the capital is
80,000 and the withdrawal is 5,000 while income is 120,000, how much is the expense of the business?

The Expanded Equation
Illustration 2:
The business has total assets of P230,000 and liabilities of P50,000. If the investment by the owner is 60,000 and the withdrawal is
5,000 while expense is 60,000, how much is the income of the business?

The Expanded Equation
Illustration 3:
The business has total assets of P230,000 and equity of P100,000. If the investment by the owner is 70,000 and the income is
120,000 while expense is 60,000, how much is the withdrawal?

Let’s have a one minute break so that we can absorb the concepts of the previous topic.

The Three-Level Analysis
Assets Liabilities Equity
Beginning
Changes
Ending

The Three-Level Analysis
The three level analysis is a method used to analyze effects of transactions for a given period. This process sill follows the principle of the basic accounting equation.

The Three-Level Analysis
Illustration:
At the beginning of the year, the assets of the business were P160,000 while the equity is at P65,000. At the end of the year, the liabilities increased by P20,000 while the assets increased to P250,000.

End of Lecture
Thank You!