Senior High School

Fundamentals of
Accountancy, Business and
Management 1
Quarter 3 - Module 3:
The Accounting Equation

Department of Education  Republic of the

Philippines
Fundamentals of Accountancy, Business and Management 1 - Senior High School
Alternative Delivery Mode
Quarter 3 - Module 3: The Accounting Equation
First Edition, 2020

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Published by the Department of Education - Region X - Northern Mindanao

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 Senior High School

Fundamentals of
Accountancy, Business
and Management 1
Quarter 3 - Module 3:
The Accounting Equation

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Department of Education  Republic of the

Philippines
 Table of Contents
Introduction ---------------------------------------------------------------------- 1

Pre-test ---------------------------------------------------------------------- 3

Lesson ---------------------------------------------------------------------- 4

Post-test ---------------------------------------------------------------------- 13

Answer Key ---------------------------------------------------------------------- 15

Reference ---------------------------------------------------------------------- 16
 What I Need To Know

For the Learners

This is an introductory course in accounting, business and management data analysis that
will develop your appreciation of accounting as language of business and an understanding
of basic accounting concepts and principles that will help you analyse business
transactions.

Good Job! Thank you for completing Module 2. You are now ready for the next lesson
which is The Accounting Equation. You need to learn more effectively. Good luck!

Module Content

This module in Fundamentals of Accountancy, Business and Management 1

for the 21st century learners is designed to make learning more engaging and
meaningful to ABM Senior High School learners in the flexible and blended learning
environments.

In this module, you will be acquainted with the fundamental accounting

equation which will serve as your guide in the business world. You will have a better
understanding of the components of the accounting equation and the relationship
between and among the accounting elements. The accounting terms such as
Assets, Liabilities, and Owner’s Equity will be discussed thoroughly and you will be
able to put your understanding to test as you will be given the opportunity to solve
simple cases using the lessons you will learn through this module.

Learning is fun! So enjoy your journey as you unfold the most interesting and
worthwhile activities in accounting.

These are the competencies included in this module:

 Illustrate the accounting equation (ABM_FABM11- IIIb-c-17)

 Perform operations involving simple cases with the use of accounting

equation (ABM_FABM11- IIIb-c-18)

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 General Instructions

To do well in this module, you need to remember the following:

1. Read texts carefully.

2. Answer questions with all honesty.

3. Review your answers.

4. Follow instructions given.

5. Do the tasks given and do not delay in submitting requirements.

6. Feel free to communicate with your teacher.

7. Remember to review every time you are done answering the activities.

8. Have fun as you learn.

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 What I Know

Let us check your prior knowledge about this module’s coverage.

Directions: Encircle the letter of the best answer.

[Link] shows the relationship between a company’s assets, liabilities, and capital.
a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation

[Link] refers to the economic resources owned by the company.

a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation

[Link] refers to the property and rights owned by the business.

a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation

[Link] refers to the investment of an owner.

a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation

[Link] include claims of the creditors on the assets of the company.

a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation

[Link] refers to the obligations to pay and debts of a company.

a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation

[Link] has to show a balance in every business transaction.

a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation

[Link] includes a company’s cash, supplies, and equipment.

a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation

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 [Link] shows no changes when an owner invests additional cash in the business.
a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation

10. This demonstrates the dual aspect of a business transaction and proves
that Debit = Credit.
a. Assets c. Owner’s Equity
b. Liabilities d. Accounting Equation

The Accounting Equation

What’s In

Activity 1: Review

Complete the statement.

In the previous module, I learned that

What’s New

Activity 2: Find the missing values.

ASSETS LIABILITIES OWNER’S EQUITY

1 250,000 150,000 100,000
2 665,000 347,000

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3 234,000 434,000
4 123,000 23,000
5 876,000 500,000
6 15,000 5,999
7 1,089,021.18 396,156.93
8 68,000 66% of assets
9 1/3 of owner’s equity 143,628
10 164% of liabilities 26,007

What Is It

The accounting equation formula represents the relationship between the assets,
liabilities, and owner's equity of a business. The value of a company's assets should
always equal the sum of its liabilities and owner's equity. The underlying concept of
this formula is that every asset acquired by a company was financed either through
debt (liability) or through investment from owners (owner’s equity).

The accounting formula materializes a company's assets in terms of its liabilities and
owner’s equity. This simple formula serves as the foundation of double-entry
bookkeeping wherein there are always two account entries made for each
transaction—a debit to one account and a credit to another.

Keep reading to have a better understanding on the accounting formula basics, its
elements, and its relationship to one another.

The Accounting Equation

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The Elements of the Accounting Equation

1. Assets - these are economic resources owned by the company expected for
future gain. They are property and rights of value owned by the company.

Assets refer to items like cash, inventory, accounts

receivable, buildings, land, or equipment. Purchasing
something with the company’s cash on hand will not
affect the accounting equation because it's just
converting one type of asset (cash) into another type of
asset (inventory, equipment, or whatever else is
purchased). The accounting formula doesn't differentiate
between types of assets.

2. Liabilities - these are debts or obligations, which are

amounts owed to others. These include debts,
obligations to pay, and claims of the creditors on the
assets of the company. Liabilities are one of three ways
In which a business can acquire funding.

Liabilities can include bank loans, credit card accounts,

or accounts payable (such as when a supplier offers to
extend credit to a business).

3. Owner’s Equity - these are the total capital the

owners have invested in the business. These include
the interest of the owners on the company; claims of
the owners on the assets of the company; and the
investment of the owner plus or minus the results on
the operations of the company.

Owner’s Equity or Capital comes from two main sources:

investment of owners and earning from the company.

Let us put into practice the accounting equation above. For example, if Company
Tibs owns Php100, 000 in assets but owes Php30, 000 to creditors, how much would
be the total claim of the owners?

Assets = Liabilities + Owner’s Equity

Php100, 000 = Php30, 000 +?
Php100, 000 = Php30, 000 + Php70, 000
Php100, 000 = Php100, 000

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 The equity to which owners/investors have a claim is Php70, 000. As you can
see, the accounting formula is all about balance. Any activity on the right side is
reflected on the left side.

Here are some more examples:

1. Given liabilities of Php10, 000 and the owner’s equity of Php50, 000. Find the
value of the assets.

Assets = Liabilities + Owner’s Equity

Assets = Php10, 000 + Php50, 000
Assets = Php60, 000

2. Given assets of Php100, 000 and the owner’s equity of Php70, 000. Find the value
of liabilities.

Assets = Liabilities + Owner’s Equity

Liabilities = Assets - Owner’s Equity
Liabilities = Php100,000 - Php70,000
Liabilities = Php30,000

3. Given assets of Php200, 000 and liabilities of Php90, 000. Find the value of the
owner’s equity.

Assets = Liabilities + Owner’s Equity

Owner’s Equity = Assets - Liabilities
Owner’s Equity = Php200,000 - Php90,000
Owner’s Equity = Php110,000

Analyzing the Effects of Business Transactions to the Accounting Equation

The accounting equation shows that for every debit, there must be an equal credit.
As we have already discussed, Assets, Liabilities and Owner’s Equity are the three
components of the accounting equation that make up a company’s balance sheet.
Accounting Equation demonstrates the dual aspect of a business transaction and
proves that Debit = Credit. Here is a table to show you the effects of transactions on
the accounting equation.

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 The following details will include the amount and the account affected in
illustrating the effects on the accounting equation. Notice that the accounting
equation is always balanced in every transaction such that assets are always equal
to liabilities and owner’s equity.

TRANSACTION ASSETS LIABILITIES OWNER’S ANALYSIS

EQUITY
1. Mr. Pacs Increase No Change Increase The cash
invests cash of Cash Mr. Pacs, investment of Mr.
Php10,000 Capital Pacs increases the
assets of the
business and the
capital (owner’s
equity) of the owner.
2. Mr. Pacs Increase No Change Increase The equipment
invests equipment Equipment Mr. Pacs, increases the
amounting to Capital assets of the
Php100,000 business. Since this
is an investment of
Mr. Pacs, her
capital
correspondingly
increases.
3. Renders Increase No Change Increase The business earns
Php5,000 services Cash Service cash by rendering
for cash Income services. There is
increase in assets
for the cash
collected and
increase in capital
as revenue
increases capital.
4. Purchases Increase Increase No Supplies increase
P1,000 supplies Supplies Accounts Change the assets of the
on credit Payable business. Liabilities

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 correspondingly
increase as the
supplies were
bought in credit.
5. Purchases Increase No Change No Land increases the
Php200,000 Land Land Change assets of the
paying cash business. Cash
Decrease correspondingly
Cash decreases with the
cash paid for the
purchase of land.

What’s More

Activity
3.

1. What is the fundamental accounting equation?

2. What are assets, liabilities, and owner’s equity?

Activity 4: Your Turn

Give the effect of the following transactions on the accounting equation.

On August 21, 2020, Don JPacs opens Pacs Laundry Services. On the
transaction summary table below, indicate the effect of each transaction to each
account. Put “+” to signify increase or “-” to signify decrease. Indicate the amount of
increase or decrease for each account. The first one is done for you.

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 TRANSACTION ASSETS LIABILITIES OWNER’S
EQUITY
1. Don Jpacs invested + +
Php100, 000 cash in the Php100,000 Php100,000
business.
2. Bought Php 2,000 worth of
supplies by cash.
3. Borrowed Php50, 000 cash
from Don Almabs.
4. Services rendered to client
on credit worth Php5,000
5. Cash services rendered to
Ms. Rastaken, Php10,000

What I Have Learned

Reflective Question:

How can you apply the Accounting Equation to your daily transactions as a
student and as a consumer? What are some examples of these transactions?

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 What I Can Do

Activity 5. My Own Accounting Equation

Applying the accounting equation to your daily life as a student and consumer, write
your transactions made on a day to day basis and analyse the effects of each
transaction to the different accounting accounts.

TRANSACTION ASSETS LIABILITIES OWNER’S

EQUITY

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Self-Check!

Great job! You have completed Module 3 successfully! Before going to the next
lesson, check the icon that best shows your learning experience.

I have understood the lesson well and I can even teach what
I learned to others.

I have understood the lesson but there are still other things
that I need to review and relearn.

I need to do additional work to be able to master the

lesson.I need help in some tasks.

If you checked the first icon, you are ready for module 4. If you have checked the
second icon, you need to review the things that you need to relearn. If you have
checked the third icon, it would be best if you read more and ask help from your
teacher, parents or peers in clarifying the lessons that you find it difficult. Be honest
so that you will truly improve.

Additional Activity

After doing the activities:

I noticed _

A question I have is _

I’m not sure _

I realized _

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 Assessment

Let us check how much you have learned from this module’s coverage.

Directions: Choose the corresponding answer from the word box and write it on the
space provided before each number.

Assets Decrease

Increase No Changes

Liabilities Owner’s Equity

Balance Sheet Accounting Equation

[Link] refers to the obligations to pay and debts of a company.

2. This refers to the economic resources owned by the company.

3. This has to show a balance in every business transaction.

4. This demonstrates the dual aspect of a business transaction

and proves that Debit = Credit.

5. This refers to the property and rights owned by the business..

6. This refers to the investment of an owner.

7. These include claims of the creditors on the assets of the

company.

8. This includes a company’s cash, supplies, and equipment.

9. It shows the relationship between a company’s assets,

liabilities, and capital.

10. This shows no changes when an owner invests additional

cash in the business.

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 CONGRATULATIONS
FOR COMPLETING THIS
MODULE!

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