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The Accounting Equation: ASSETS = LIABILITIES + OWNERS EQUITY In analyzing the effects of business transactions, the accounting equation

must always be balanced. The analysis involves the assets, liabilities and owners equity in the business. Sample transactions: March 1 May Gomez opened Happy Tour and Travel Service by contributing cash of P50,000. She has three cars worth P1,200,000 but contributed only two cars worth P750,000. ASSETS LIABILITIES OWNER'S EQUITY Cash 50,000 Gomez, Capital 800,000 Cars 750,000 March 3 Gomez borrowed P100,000 cash from PNB for use in her business. ASSETS LIABILITIES OWNER'S EQUITY Cash 100,000 Loans Payable 100,000 Bought tables and chairs from Blims and paid cash, P45,000. ASSETS LIABILITIES OWNER'S EQUITY Cash (45,000)
Furnitures & Fixtures 45,000

March 7

March 15

Various equipment were purchased on account from National Winners for P55,000. ASSETS LIABILITIES OWNER'S EQUITY Equipment 55,000 Accounts Payable 55,000 Gomez made cash withdrawal of P5,000 from personal use. ASSETS LIABILITIES OWNER'S EQUITY Cash (5,000) Gomez, Drawing (5,000) The account due to National Winners was paid in cash. ASSETS LIABILITIES Cash (55,000) Accounts Payable (55,000)

March 18

March 20

OWNER'S EQUITY

The summary of the effects of the transactions follows:

ASSETS DATE Cash Cars 1-Mar 50,000 750,000 3-Mar 100,000 Balances 150,000 750,000 7-Mar (45,000) Balances 105,000 750,000 15-Mar Balances 105,000 750,000 18-Mar (5,000) Balances 100,000 750,000 20-Mar (55,000) Balances 45,000 750,000 Equipment Furniture Loans Payable 100,000 100,000 45,000 45,000 55,000 55,000 55,000 55,000 45,000 45,000 45,000 100,000 100,000 100,000 100,000

LIABILITIES Accounts Payable

OWNER'S EQUITY Gomez, Gomez, Capital Drawing 800,000 800,000 800,000

55,000 55,000 55,000 (55,000) -

800,000 800,000 (5,000) (5,000)

TOTAL ASSETS = 895,000

TOTAL LIABILITIES = 100,000

800,000 (5,000) TOTAL OWNER'S EQUITY = 795,000

Aside from investment and withdrawal of the owner, there are two other transactions that may affect owners equity revenue and expense. The excess of revenues over expenses is called the net income. If expenses are more than revenues, the difference is called net loss. Net income (or net loss) eventually goes to owners equity, because it is the owner who enjoys the prosperity of the business. Therefore, the rules for revenues and expense are: If revenue increases, net income increases which results to increase in owners equity. If expense increases, net income decreases which results to decrease in owners equity. Let us continue our sample transactions of Happy Tour and Travel. March 21 A tourist hired the services of the agency for a tour in Baguio. Cash of P15,000 was received from the tourist. ASSETS LIABILITIES OWNER'S EQUITY Cash 15,000 Service Income 15,000

March 22

Cash was paid for the following: gas and oil, P500 and repair of car, P1,000. ASSETS LIABILITIES OWNER'S EQUITY Cash P1,500 Repairs Expense (P1,000) Gas and Oil Expense (P500) Mr. Gray hired the services of the agency for his visitors and promised to pay P16,000 LIABILITIES 16,000 OWNER'S EQUITY Service Income 16,000

March 24 on March 31.

ASSETS Accounts Receivable March 25

Paid telephone bill for P500. ASSETS Cash (P500)

LIABILITIES

OWNER'S EQUITY Utilities Expense (P500)

March 27 The Faculty Club of Angelicum Academy hired the services of the agency for a tour in Manila. A bill was issued to them for P20,000, 50% of which was collected. ASSETS LIABILITIES OWNER'S EQUITY Cash P10,000 Service Income P20,000 Accounts Receivable P10,000 March 30 Mr. Gray paid one-half of his account in cash. ASSETS LIABILITIES Cash P8,000 Accounts Receivable (P8,000)

OWNER'S EQUITY

March 31

Paid for rental of office space, P10,000 and salaries of employees and workers P9,000. ASSETS LIABILITIES OWNER'S EQUITY Cash (P19,000) Rent Expense (P10,000) Salary Expense (P9,000)

The effects of the transactions to the account balances follow: ASSETS DATE Balances 21-Mar Balances 22-Mar Balances 24-Mar Balances Cash 45,000 15,000 60,000 (1,500) 58,500 58,500 16,000 16,000 Accounts Receivable Cars 750,000 750,000 Equipment 55,000 55,000 Furniture 45,000 45,000 LIABILITIES Loans Payable 100,000 100,000 OWNER'S EQUITY Gomez, Capital Gomez, Drawing 800,000 (5,000) 15,000 815,000 (5,000) (500) (1,000) 813,500 (5,000) 16,000 829,500 (5,000)

750,000 750,000

55,000 55,000

45,000 45,000

100,000 100,000

25-Mar Balances 27-Mar Balances 30-Mar Balances 31-Mar Balances

(500) 58,000 10,000 68,000 8,000 76,000 (19,000) 57,000

16,000 10,000 26,000 (8,000) 18,000

750,000 750,000 750,000

55,000 55,000 55,000

45,000 45,000 45,000

100,000 100,000 100,000

(500) 829,000 20,000 849,000 849,000 (10,000) (9,000) 830,000

(5,000) (5,000) (5,000)

18,000

750,000

55,000

45,000

100,000

(5,000)

TOTAL ASSETS = TOTAL LIABILITIES + TOTAL OWNERS EQUITY 925,000 = 100,000 + 825,000