IT 213 Accounting Principles Lesson 1: The Accounting Equation PDF

SCHOOL OF ACCOUNTANCY, BUSINESS AND Document No.: HOSPITALITY Revision No.: 00 Effectivity Date: August 14, 2023...

SCHOOL OF ACCOUNTANCY, BUSINESS AND Document No.: HOSPITALITY Revision No.: 00 Effectivity Date: August 14, 2023 COURSE LEARNING MODULE Page No. : 1 of 8 IT 213- Accounting Principles Lesson 1: The Accounting Equation REMINDERS: Expect to do a lot of reading, problem-solving activities and other self-directed activities. Varied assessments or activities will be given. At the outset, I am strictly warning you against copying your classmates’ output without exerting any effort. We will be asking you to make a Journal of Learning or portfolio to record and assess the extent of learning during the term. For this week, the following shall be your guide for the different lessons and tasks that you need to accomplish. Be patient, read them carefully before proceeding to the tasks expected of you. HAVE A FRUITFUL LEARNING EXPERIENCE 😊 Topic: I. The accounting equation a. The basic accounting equation b. The expanded accounting equation a. Applications of the accounting equation Learning Outcomes: 1. Elaborate the accounting equation 2. Perform operations involving simple cases with the use of accounting equation LEARNING CONTENT Good Morning and Welcome to our class. Our course for this semester is Financial Accounting and Reporting, the foundation of all accounting related courses. Before we start. Let us first concentrate on basic accounting equation. What is the Accounting Equation? An accounting transaction is a business activity or event that causes a measurable change in the accounting equation. The accounting equation is a basic principle of accounting and a fundamental element of the balance sheet. The equation is as follows: Assets = Liabilities + Equity IT 213- Accounting Principles | 1 This document is a property of University of Saint Louis Tuguegarao. It must not be reproduced nor transmitted in any form, in whole or in part, without expressed written permission.  SCHOOL OF ACCOUNTANCY, BUSINESS AND Document No.: HOSPITALITY Revision No.: 00 Effectivity Date: August 14, 2023 COURSE LEARNING MODULE Page No. : 2 of 8 This equation sets the foundation of double-entry accounting and highlights the structure of the balance sheet. Double-entry accounting is a system where every transaction affects both sides of the accounting equation. For every change to an asset account, there must be an equal change to a related liability or equity account. It is important to keep the accounting equation in mind when performing journal entries. NOTE: If an entity keeps accurate records, the accounting equation will always be "in balance," meaning the left side should always equal the right side. The balance is maintained because every business transaction affects at least two of an entity's accounts. For example, when an entity borrows money from a bank, the entity's assets will increase and its liabilities will increase by the same amount. When an entity purchases inventory for cash, one asset will increase and one asset will decrease. Because there are two or more accounts affected by every transaction, the accounting system is referred to as double-entry accounting. The balance sheet is broken down into three major sections and their various underlying items: Assets, Liabilities and Equity. ASSETS- are future economic benefits controlled by an organization/entity as a result of past transactions or other past events. IT 213- Accounting Principles | 2 This document is a property of University of Saint Louis Tuguegarao. It must not be reproduced nor transmitted in any form, in whole or in part, without expressed written permission.  SCHOOL OF ACCOUNTANCY, BUSINESS AND Document No.: HOSPITALITY Revision No.: 00 Effectivity Date: August 14, 2023 COURSE LEARNING MODULE Page No. : 3 of 8 -reflect the total value of the property that the business has, and which is in its turnover. In other words, it is what it owns. LIABILITIES- Liabilities are future sacrifices of economic benefits that an organization is presently obliged to make to other organizations or individuals as a result of past transactions or events. -reflect the size of the financing of an organization’s assets by third parties, banks, and private financial institutions. This is what the company owes. EQUITY- represents the residual (what is left) once all fixed claims have been satisfied or simply “assets less/minus liabilities”. -equity characterizes the value of investments made in this organization by its owner/s Example 1: Juan dela Cruz started his Coffee Shop business by investing his Cash savings amounting to P 500,000.00 and borrowed P250,000.00 from ABC Bank. Assets= Cash P 500,000.00 (owned) Assets = Liabilities + Equity P 500,000.00 = P 250,000.00 + P 250,000.00 Liabilities= Loan P 250,000.00 (owed) Assets - Liabilities= Equity Equity= Assets – Liabilities (P 250,000.00) P 500,000.00 – P 250,000.00 = P 250,000.00 Assets – Equity = Liabilities P 500,000.00 – P 250,000.00 = P 250,000.00 IT 213- Accounting Principles | 3 This document is a property of University of Saint Louis Tuguegarao. It must not be reproduced nor transmitted in any form, in whole or in part, without expressed written permission.  SCHOOL OF ACCOUNTANCY, BUSINESS AND Document No.: HOSPITALITY Revision No.: 00 Effectivity Date: August 14, 2023 COURSE LEARNING MODULE Page No. : 4 of 8 THE EXPANDED ACCOUNTING EQUATION The expanded accounting equation provides more details for the owner's equity amount shown in the basic accounting equation. The expanded accounting equation for a sole proprietorship is: Assets = Liabilities + Equity (Owner's Capital) + Revenues – Expenses – Owner's Draws. The expanded accounting equation allows you to see separately (1) the impact on equity from net income (increased by revenues, decreased by expenses), and (2) the effect of transactions with owners (draws, dividends, sale or purchase of ownership interest). IT 213- Accounting Principles | 4 This document is a property of University of Saint Louis Tuguegarao. It must not be reproduced nor transmitted in any form, in whole or in part, without expressed written permission.  SCHOOL OF ACCOUNTANCY, BUSINESS AND Document No.: HOSPITALITY Revision No.: 00 Effectivity Date: August 14, 2023 COURSE LEARNING MODULE Page No. : 5 of 8 EQUITY- is the residual interest in the assets of the entity after deducting all the liabilities (IASB Framework). - is what the owners of an entity have invested in an enterprise. It represents what the business owes to its owners. It is also a reflection of the capital left in the business after assets of the entity are used to pay off any outstanding liabilities. REVENUE- is the income generated from normal business operations and includes discounts and deductions for returned merchandise. It is the top line or gross income figure from which costs are subtracted to determine net income. - If the revenues earned are a main activity of the business, they are considered to be operating revenues. If the revenues come from a secondary activity, they are considered to be non- operating revenues. - Normally increases ASSETS. EXPENSE- An expense is the cost of operations that a company incurs to generate revenue. As the popular saying goes, “it costs money to make money.” - There are two main categories of business expenses in accounting: operating expenses and non- operating expenses. - Normally decreases ASSETS. ***The difference between revenue and expenses represents profit or loss. - If revenue is greater than expenses, the difference is profit - If revenue is less than expenses, the difference is loss IT 213- Accounting Principles | 5 This document is a property of University of Saint Louis Tuguegarao. It must not be reproduced nor transmitted in any form, in whole or in part, without expressed written permission.  SCHOOL OF ACCOUNTANCY, BUSINESS AND Document No.: HOSPITALITY Revision No.: 00 Effectivity Date: August 14, 2023 COURSE LEARNING MODULE Page No. : 6 of 8 Example 2: Juan dela Cruz, on the first month of operating his Coffee Shop, earned a Revenue (received cash) of P 50,000.00 and incurred total expenses (paid cash) of in the amount of P 30,000.00 (Wages of crew/staff/cashier, Supplies, Rent, Utility Expenses). Assets= P 500,000.00 Liabilities= P 250,000.00 Equity= P 250,000.00 Revenue= P 50,000.00 Expenses= P 30,000.00 ASSETS = LIABILITIE + EQUITY + REVENU - EXPENSE S E S Example 1- Juan dela Cruz P P P -0- -0- started his Coffee Shop 500,000.00 250,000.00 250,000.00 business by investing his Cash savings amounting to P 500,000.00 and borrowed P250,000.00 from ABC Bank. IT 213- Accounting Principles | 6 This document is a property of University of Saint Louis Tuguegarao. It must not be reproduced nor transmitted in any form, in whole or in part, without expressed written permission.  SCHOOL OF ACCOUNTANCY, BUSINESS AND Document No.: HOSPITALITY Revision No.: 00 Effectivity Date: August 14, 2023 COURSE LEARNING MODULE Page No. : 7 of 8 Example 2- Juan dela P 50,000.00 P Cruz, on the first month of 50,000.00 operating his Coffee Shop, (P P earned a Revenue 30,000.00) 30,000.00 (received cash) of P 50,000.00 and incurred total expenses (paid cash) of in the amount of P 30,000.00 (Wages of crew/ staff/ cashier, Supplies, Rent, Utility Expenses). P P P P P 520,000.00 250,000.00 250,000.00 50,000.00 30,000.00 P P P 520,000.00 250,000.00 270,000.00 Meantime, we end our lecture here. Within the week, an online discussion will be conducted to expound the topic. Have a fruitful learning. *** END of LESSON 1*** REFERENCES: Printed Resources: 1. Ballada, W. (2020). Basic Financial Accounting and Reporting. Manila: DomDane Publishers. 2. Cabrera, E.(2020) Fundamentals of Accounting Volume I, GIC Enterprises & Co., Inc., Manila 3. Millan, Z. V. (2023). Financial Accounting and Reporting (Fundamentals). Baguio City: Bandolin Enterprise 4. Valix, C. (2020). Financial Accounting Volume I GIC Enterprises & Co., Inc., Manila Electronic Resource: 1. Accounting Basic https://www.accountingcoach.com/accounting-basics/explanation 2. Basic Accounting. https://www.bizfilings.com/toolkit/research-topics/finance/basic-accounting/the- accounting-system-and-accounting-basics 3. Basic accounting and bookkeeping lessons, http://www.moneyinstructor.com/accounting.asp 4. Financial Accounting. https://www.accountingcoach.com/financial-accounting/explanation 5. Accounting Tutorials for Beginners. https://www.guru99.com/accounting.html 6. https://corporatefinanceinstitute.com/resources/knowledge/accounting/accounting-equation/ IT 213- Accounting Principles | 7 This document is a property of University of Saint Louis Tuguegarao. It must not be reproduced nor transmitted in any form, in whole or in part, without expressed written permission.  SCHOOL OF ACCOUNTANCY, BUSINESS AND Document No.: HOSPITALITY Revision No.: 00 Effectivity Date: August 14, 2023 COURSE LEARNING MODULE Page No. : 8 of 8 7. https://bobsteelecpa.com/accounting-equation-account-types-and-the-double-entry-accounting-equation/ 8. https://www.bookstime.com/what-is-the-accounting-equation 9. https://www.accountingcoach.com/blog/expanded-accounting-equation 10. https://accounting-simplified.com/equity.html 11. https://www.investopedia.com/ 12. https://courses.lumenlearning.com/sac-finaccounting/chapter/the-basic-accounting-equation/ IT 213- Accounting Principles | 8 This document is a property of University of Saint Louis Tuguegarao. It must not be reproduced nor transmitted in any form, in whole or in part, without expressed written permission.