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The Basic Accounting Equation

Assets	=	Liabilities	+	Owner’s Equity

Yes, asset is the sum of loans and capital combined. This applies to any nature and size of business. This equation is the underlying framework for recording business transactions.

Take note that every financial statements must be presented in a sequence wherein the most liquid account comes first. This means that the liabilities MUST ALWAYS be liquidated first before the claims of the owner.

Assets

These are the resources that are owned by the business. In other words, these are the things that the business needs for it to run productively.

We can classify these into two types:

Tangible Assets

These are assets that can be seen and can be touched. This includes cash on hand, cash in bank, building, supplies, furniture and fixtures, equipment, etc.

Intangible Assets

These are assets that canNOT be seen or touched. This includes goodwill, patent, trademark, etc.

All assets has a normal balance of Debit.

Liabilities

Liabilities are the amount that the business owes from a bank or other lending companies. (e.g.Accounts Payable, Mortgage Payable, etc.)

Liabilities has normal balance of Credit.

Owner’s Equity/ Owner’s Capital

This is the owner’s claim in the total amount of assets after deducting the liabilities. These are the investments that were made throughout the business’s life.

Owner’s Equity	=	Assets	–	Liabilities

Increase in owner’s equity

Initial Investment

This is the owner’s starting capital. Its normal balance is Credit.

Additional Investments

This are the assets that the owner invests in the business. It has a normal balance of Credit.

Revenues / Sales

This is the amount that was earned by the business through its course. It has a normal balance of Credit.

Decrease in Owner’s Equity

Owner’s Drawings

This is the amount that was withdrawn by the owner for personal use. Its normal balance is Debit.

Expenses

These are the costs of production in a given cycle. It has a normal balance of Debit.

The Expanded Accounting Equation

Assets =	Liabilities +	Owner’s Capital –	Owner’s Drawings +	Revenues –	Expenses

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Activity:

In the given transactions below, state their corresponding effects in the Owner’s Capital. (Increase or Decrease, None)

1. Mrs. J used her personal money to acquire a new printer for her business.
2. Company H paid the monthly rent.
3. The business bought supplies for cash.
4. Rendered services for cash.
5. Mr. Z borrowed $20,000 from the bank to purchase a machine for his business.

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Previous Lessons:

• Accounting 101 – The Accounting Process: Identify, Record, And Communicate

• Accounting 101 – Generally Accepted Accounting Principles (GAAP)

References:

• Accounting Principles 12^th Edition (p.12-14), by J.J. Weygandt, P.D. Kimmel, D.E. Kieso
• https://www.accountingcoach.com/accounting-equation/explanation/11

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