AE100 2:

Accounting Equation
ACCOUNTING EQUATION

LIABILITIES

CAPITAL
ACCOUNTING EQUATION

-isLIABILITIES
a present economic
resource controlled by
the entity as a result of
past events
CAPITAL
ACCOUNTING EQUATION

-present obligation of LIABILITIES

the entity to transfer
an economic resource
as a result of past
events CAPITAL
ACCOUNTING EQUATION

-residual interest in
the assets of the
enterprise after LIABILITIES
deducting all its
liabilities
-increases through
income and
CAPITAL
investment
ASSETS

• Asset 0 Ari
• Owned Asset 0 Sariling Ari
• Other Asset
0 Ari ng Iba
• Fixed Asset
0 Aring Nakatirik
• Liquid Asset
• Earning Asset 0 Aring Tumutulo
• Tangible Asset 0 Aring Ganado Pa
• Written-off Asset 0 Aring Nasasalat
0 Aring Pinutol
ASSETS

• CURRENT ASSETS- used/consumed within one operating cycle

• NON-CURRENT ASSETS- used/consumed within one operating cycle
CURRENT ASSETS

• Cash- any medium of exchange that a bank will accept for deposit at
face value
• Cash Equivalents- these are short-term, highly liquid investments that
are readily convertible to known amounts of cash and which are
subject to an insignificant risk of changes in value
• Notes Receivable- a note receivable is a written pledge that the
customer will pay the business a fixed amount of money on a certain
date, SPECIFIED THAT IT IS COLLECTIBLE WITHIN ONE YEAR
CURRENT ASSETS

• Cash- any medium of exchange that a bank will accept for deposit at
face value
• Cash Equivalents- these are short-term, highly liquid investments that
are readily convertible to known amounts of cash and which are
subject to an insignificant risk of changes in value
• Notes Receivable- a note receivable is a written pledge that the
customer will pay the business a fixed amount of money on a certain
date, SPECIFIED THAT IT IS COLLECTIBLE WITHIN ONE YEAR
CURRENT ASSETS

•Accounts Receivable- These are claims

against customers arising from sale of
services or goods on credit.
•Inventories- raw materials, work in process,
or finished goods held for sale
•Prepaid Expenses- These are expenses paid
for by the business in advance.
NON-CURRENT ASSETS

• Property, Plant and Equipment- tangible assets that are held by an

enterprise for use in the production or supply of goods or services, or
for rental to others, or for administrative purposes and which are
expected to be used during more than one period.
• Accumulated Depreciation- it is a contra account that contains the
sum of the periodic depreciation charges. PPE-Acc. Dep= Book Value
or Carrying Amount of PPE
• Intangible Assets- without physical substance…
CURRENT LIABILITIES

• Accounts Payable- buyer agrees to pay for them in the

near future
• Notes Payable
• Accrued Liabilities- Amounts owed to others for unpaid
expenses
• Unearned Revenues-When the business entity receives
payment before providing its customers with goods or
services
• Current Portion of Long-term Debt
NON-CURRENT LIABILITIES

• Mortgage Payable- long-term debt for which the

business entity has pledged certain assets as
security to the creditor.
• Bonds Payable- Substantial amount of financing,
usually for acquisition of assets
Owner’s Equity

•Capital= investments + income –

loss/expense – withdrawals
Income

SERVICE INCOME
VS
SALES
1. Which of the following accounting
equations are correct?
I. Non-current assets + Current Assets= Non-
current Liabilities – Current Liabilities +
Capital
II. Assets-Liabilities=Capital+Revenue-
Expenses
III. Capital +Non-current liabilities= Non-
current assets + Working Capital
2. Which of the following is not an example of
additional capital?
a. A sole proprietor purchases a car through the
bank account of the entity
b. A sole proprietor brings a second-hand
computer from his home
c. A sole proprietor transfer P1,000 from his own
bank account to the entity’s account.
d. A sole proprietor uses his own building as an
office without receiving any rent.
2. Which of the following is not an example of
additional capital?
a. A sole proprietor purchases a car through the
bank account of the entity
b. A sole proprietor brings a second-hand
computer from his home
c. A sole proprietor transfer P1,000 from his own
bank account to the entity’s account.
d. A sole proprietor uses his own building as an
office without receiving any rent.
3. Which of the following is not an example of
non-current assets?
a. A second-hand computer used in the office
b. A van that is purchased through installments
the total amount of which is not fully settled
c. P40,000 cash
d. A building bought by the entity
4. Which of the following statements are correct?
I. The total amount of liabilities can be greater
than the total amount of capital.
II. Assets= Capital + Liabilities
III. The Total amount of assets can be greater
than the sum of liabilities and equity
5. The entity purchases P10,000 fixtures for entity
use on credit. Which of the following will be
affected?
I. Assets
II. Liabilities
III. Capital
6. Suppose a debtor repays his debt of P50,000 by
transferring the money into the bank account of
the business. The effect of the transaction on the
accounting equation would be:
a. Both assets and liabilities increase by P50,000.
b. Both assets and liabilities decrease by
P50,000.
c. Only assets decrease by P50,000.
d. Assets and Liabilities remain unchanged.
6. Suppose a debtor repays his debt of P50,000 by
transferring the money into the bank account of
the business. The effect of the transaction on the
accounting equation would be:
a. Both assets and liabilities increase by P50,000.
b. Both assets and liabilities decrease by
P50,000.
c. Only assets decrease by P50,000.
d. Assets and Liabilities remain unchanged.
6. Suppose a debtor repays his debt of P50,000 by
transferring the money into the bank account of
the business. The effect of the transaction on the
accounting equation would be:
a. Both assets and liabilities increase by P50,000.
b. Both assets and liabilities decrease by
P50,000.
c. Only assets decrease by P50,000.
d. Assets and Liabilities remain unchanged.
7. Under the double-entry system, what is the
value of X if assets, current liabilities noncurrent
liabilities and capital are X, P40,000, P60,000 and
P350,000 respectively?
a. P250,000
b. P350,000
c. P370,000
d. P450,000
8. Which of the following is correct under the
double-entry system?
a. Asset amount must be equal to liability
amount.
b. The change in asset must be compensated by
a change in liability.
c. The change in a debit-side entry must be
compensated by a change in credit-side entry.
d. An increase in asset must be compensated by
a decrease in asset.
9. Which of the following statements regarding
the double-entry system is incorrect?
a. An increase in asset means a credit entry in
assets account.
b. A decrease in liability means a debit entry in
liabilities account.
c. An increase in drawings means a debit entry in
the capital account.
d. A decrease in non-current asset means a
credit entry in assets account.
10. Which of the following transactions affects the
total value of liabilities of a firm?
a. Goods purchased from suppliers by cash
b. Interest received from bank
c. Office equipment bought on credit
d. Goods sold to customers on credit
11. On April 1, 2019 Girum sets up a firm and
brings in office equipment of P50,000 and
inventory of P30,000 to the business. Girum puts
P80,000 into the firm’s cash box and P100,000
into the firm’s bank account. Meanwhile, the firm
lends P50,000 cash to SJ and Associates and
borrows P200,000 from the bank to acquire a
piece of premises.
What is the amount of the firm’s capital on April
1, 2019?
a. P510,000
b. P210,000
c. P260,000
d. P460,000
 ASSETS LIABILITIES CAPITAL

a. Paid salaries for May,

P54,000. - -
b. Acquired equipment on
credit, P90,000. + +
c. Purchased supplies in cash,
P3,000.
d. Additional investment by
owner, P120,000. + +
e. Received cash for rendering
services, P18,000. + +
 ASSETS LIABILITIES CAPITAL

f. Made partial payment on

equipment acquired on credit,
P30,000.
- -
g. Billed customers for services
performed, P48,000. + +
h. Withdrew cash for personal use,
P45,000. - -
i. Received payment from customers
already billed, P9,000.

j. Received bills for utilities to be paid

next month, P2,100. - -
 CA NCA CL NCL CAP

Jobs, Pablo invested cash, land and building to establish Hardwood

Company.
+ + +
Pablo purchased Equipment for Hardwood and paid cash.

- +
He also purchased, on account, various supplies.

+ +
In order to provide services, Jobs borrowed money from the bank, to be
paid in 4 years.
+ +
Jobs purchased 4 machines, and paid with cash and bonds payable. The
bonds payable is to be paid for 5 years, 1st payment will start on year-end.
- + + +
Signed an agreement with clients to process their furniture orders.

Received partial payment from clients for the furnitures to be made by

+ +
Hardwood.
 CA NCA CL NCL CAP

Finished and delivered the furnitures to the clients and issued billing for
the remaining amount to be collected.
+ - +
Paid for the supplies purchased on account.

- -
Received electric bill for the month.

+ -
Due to personal reasons, Jobs decided to withdraw a certain amount from
the business.
- -
At year-end, the machineries and equipment were utilized.
- -
Received full payment from customers for their remaining balance on
account.

Paid for rent equivalent for the next 6 months.