THE ACCOUNTING EQUATION

- Has two elements which equally divide the entity into two parts: the left side of the
equation represents what the entity owns (ASSET); while the right side represents those
that the company owes (LIABILITIES & EQUITY).
- The two sides of the equation should always be balanced.
- Stated as “Assets = Liabilities + Equity”

ELEMENTS OF THE ACCOUNTING EQUATION

 ASSETS
 Are defined as “resources controlled by the enterprise as a result of past
transactions and events and from which future economic benefits are expected
to flow the enterprise”.
1. CASH
- The account title to describe money, either in paper or in coins and
money substitutes like checks.
o Cash on Hand – when cash is within the premise of the business.
o Cash in Bank – when cash is deposited in the bank.
2. ACCOUNTS RECEIVABLE
- This represents amounts that are collectible from customers.
- They arise when a business sells its goods or services on account or on
credit.
3. INVENTORIES
- Per PAS No. 4, these assets are:
o Held for resale
o In the process of production for such sale
o In the form of materials or supplies to be consumed in the
production process or in the rendering of services.
4. OFFICE SUPPLIES
5. EQUIPMENT
- Includes calculators, typewriters, computers, steel filing cabinets and
the like.
6. LAND AND BUILDING
7. INTANGIBLE ASSETS
- Per PAS No. 38, these are identifiable non-monetary assets without
physical existence.
 LIABILITIES
 Are defined as “present obligations of an enterprise arising from past
transactions or events, the settlement of which is expected to result in an
outflow from the enterprise of resources embodying economic benefits”.
1. ACCOUNTS PAYABLE
- An account title for a financial obligation of an enterprise that
constitutes an oral or verbal promise to pay.
 EQUITY
 is the residual interest in the assets of the enterprise after deducting all its
liabilities.
 It is increased when there is Profit or additional contributions by the owner and
decreased when there is Loss or withdrawal by the owner.
 Synonymous to proprietary interest or networth.
1. REVENUES
- PAS No. 28 defines as the “gross inflow of the economic benefits during
the period arising in the course of ordinary activities of an enterprise”.
2. EXPENSES
- Are the “gross outflow of economic benefits during the period arising in
the course of ordinary activities of an enterprise when those outflow
result in decrease in equity, other than those relating to distribution to
owners”.