Chapter 2

Accounting Equation
Importance of the Accounting Equation Business transactions affect the assets, liabilities, and proprietorship of the business. These effects can be expressed in the accounting equation: ASSETS = EQUITIES Equity is the right, claim, or interest or a person over the assets of the business. Liability represents such claim in the assets of the business and proprietorship is the owners or owners interest in the business. LIABILITIES EQUITIES PROPRIETORSHIP And since there are two sources of equities, one from the creditors (liabilities) and the other from the owner (proprietorship), then we can express the accounting equation as: ASSETS = LIABILITIES + PROPRIETORSHIP Transaction 1 Oct. 1 Mr. Gil opened a motor repair shop and invested P100, 000 cash. Equation 1 Increase in assets = Increase in Proprietorship A = L + P Cash P100, 000 = 0 + Gil, capital P100, 000 Analysis The asset, cash, is increased by P100, 000. The proprietorship account is also increased by P100, 000. Transaction 2 Oct. 3 - He purchased repair supplies worth P25, 000 on credit from De Mesa Trading Equation 2 Increase in assets = Increase in liabilities A = L + P Repair supplies P25, 000 = Due to Mesa Trading P25, 000 + 0 Analysis The asset, repair supplies, is increased by P25, 000. The account Due to Mesa Trading is increased by P25, 000. Transaction 3 Oct. 5 Billed M. Manzano for repair work done on his automobile, P12, 000 Equation 3 Increase in assets = Increase in Proprietorship A = L + P

Due from M. Manzano = 0 + Gil, capital P12, 000 P12, 000 Analysis The asset, due to M. Manzano is increased by P12, 000. The proprietorship account is also increased by P12, 000 due to the revenue from service rendered. Transaction 4 Oct. 7 He bought a table and chairs for the business, P6, 000 cash Equation 4 Increase on one form of asset = Decrease in another form of asset A = L +P Furniture P6, 000 = 0 + o Cash P6, 000 Analysis One form of asset, furniture, is increased and another form, cash, is decreased. Transaction 5 Oct. 12 Issued a promissory note to De Mesa Trading to apply on his account (Transaction 2) Equation 5 Decrease on one form of liability = Increase in another form of liability A = L + P 0 = Due to Mesa Trading (P25, 000) + 0 Notes Payable P25, 000 Analysis The account Due to Mesa Trading is decreased and another liability, Notes payable, is increased. Transaction 6 Oct. 15 Paid the salary of the assistant, P 1, 900 Equation 6 Decrease in assets = Decrease in Proprietorship A = L + P Cash = 0 + Gil, capital (P 1, 900) Analysis The asset, cash, is decreased by P 1, 900 and the proprietorship account is also decreased due to the salary expense incurred by the business.

Transaction 7 Oct. 20 - Paid the note issued to the De Mesa Trading (Transaction 2)

Equation 7 Decrease in assets = Decrease in Liabilities A = L + P Cash (P 25, 000) = Notes Payable (P 25, 000) + 0 Analysis The asset, cash, and the liability, notes payable, are decreased.

Transaction 8 Oct. 29 Mr. Gil withdraw P 15, 000 from the business for his personal use. Equation 8 Decrease in assets = Decrease in Proprietorship A = L + P Cash (P 15, 000) = 0 + Gil, capital (P 15, 000) Analysis The asset, cash, is decreased and the proprietorship is also decreased due to the amount withdrawn by the owner for his personal use.