Ever wonder how businesses keep track of their money and... Show more
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Science
Econ
Araling Panlipunan (AP)
Iba pa
Practical Research
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12/15/2025
FABM
THE ACCOUNTING EQUATION
432
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Dec 15, 2025
•
Understanding the Accounting Equation: Notes for Beginners
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y
@yareuhere
1 / 6
The Foundation: Understanding the Accounting Equation
Think of the accounting equation as the backbone of every business - it's literally the foundation that keeps all financial records organized and balanced. This powerful formula shows two crucial things about any company: what it owns and what it owes to others.
The magic formula is Assets = Liabilities + Equity. Assets are the economic resources a business owns (like cash, equipment, or buildings). Liabilities represent the financial obligations or debts the business owes to others. Stockholder's equity (or owner's equity) shows the owner's claim on the business assets.
Here's how it works in real life: if a business has ₱90,000 in owner's equity and ₱30,000 in liabilities, then its total assets must equal ₱120,000. The equation always balances perfectly - that's what makes accounting reliable and trustworthy for business decisions.
Pro Tip: Remember that this equation must ALWAYS balance - if it doesn't, there's an error somewhere in your calculations!
The Five Major Account Types
Every business transaction involves five major account categories that you'll encounter constantly in accounting. Assets represent economic resources owned by the business, like cash, equipment, and inventory that provide future economic benefits.
Current assets can be converted to cash within one year (cash on hand, accounts receivable, inventories, unused supplies). Non-current assets stick around longer than a year (equipment, buildings, land). These classifications help businesses understand their liquidity and long-term investments.
The other major accounts include liabilities (what you owe), capital (owner's investment), income (money earned), and expenses (costs of doing business). Understanding these categories makes analyzing any business transaction much simpler.
Quick Check: If someone asks about a company's "economic resources," they're talking about assets - everything valuable the business owns and controls.
Liabilities and Owner's Equity Explained
Liabilities are the economic obligations your business owes to others - basically, all the money you need to pay back. These debts come from past transactions and require you to give up economic benefits (usually cash) to settle them.
Just like assets, liabilities split into two main types. Current liabilities must be paid within one year (accounts payable, notes payable, loans payable). Non-current liabilities give you more breathing room - you don't have to pay these back for over a year.
Owner's equity represents the owner's interest in the business - it's their claim on company assets. This includes the original capital investment, plus any profits earned, minus any personal withdrawals. Think of it as the owner's "slice of the pie" in terms of business value.
Remember: Liabilities aren't necessarily bad - many successful businesses use debt strategically to grow and expand their operations.
Revenue and Expenses: The Money Flow
Revenue is the money your business earns from its main operations - whether that's providing services, selling products, or earning professional fees. This includes service revenue, interest income, sales, and professional fees that flow into your business.
Expenses represent the costs you incur while generating that revenue. Common expenses include utilities, salaries, wages, taxes and licenses, cost of sales, and depreciation. These are the necessary costs of doing business.
Let's see this in action: when Many Integrity starts a transportation business with ₱500,000 cash investment, the accounting equation shows Assets (₱500,000 cash) = Liabilities (₱0) + Owner's Equity (₱500,000 M. Integrity, capital). Everything balances perfectly from day one.
Key Insight: Revenue increases owner's equity, while expenses decrease it - this is how businesses track whether they're making or losing money.
Tracking Business Transactions
Every business transaction affects the accounting equation, but the equation must always stay balanced. When Mr. Integrity buys three tricycles for ₱150,000 on credit, assets increase by ₱150,000 (tricycles) and liabilities increase by ₱150,000 (accounts payable).
Revenue transactions boost both assets and owner's equity. When cash of ₱16,000 comes in from passenger transportation, cash (asset) increases by ₱16,000 and transportation revenue (owner's equity) increases by the same amount.
Payment transactions move money between asset and liability accounts. Paying ₱100,000 to TRUST, Inc. decreases both cash (asset) and accounts payable (liability) by ₱100,000. When Ms. Integrity withdraws ₱10,000 for personal use, both cash and owner's equity decrease.
Reality Check: Every transaction tells a story - practice reading these stories to understand how businesses really operate day-to-day.
Putting It All Together
Business transactions continue throughout operations, and each one must maintain the accounting equation balance. Purchasing tables and chairs for ₱6,000 in cash simply shifts money from one asset (cash) to another asset (furniture) - total assets stay the same.
Expense transactions like paying ₱40,000 in employee salaries decrease both cash (asset) and owner's equity through salary expense. This reflects the cost of running the business and generating revenue.
After multiple transactions, you can summarize everything: total assets of ₱516,000 equal liabilities of ₱50,000 plus owner's equity of ₱466,000. The equation balances perfectly, proving all transactions were recorded correctly and giving confidence in the financial information.
Success Strategy: Always double-check that your equation balances after each transaction - this simple habit prevents major accounting headaches later!
We thought you’d never ask...
What is the Knowunity AI companion?
Our AI companion is specifically built for the needs of students. Based on the millions of content pieces we have on the platform we can provide truly meaningful and relevant answers to students. But its not only about answers, the companion is even more about guiding students through their daily learning challenges, with personalised study plans, quizzes or content pieces in the chat and 100% personalisation based on the students skills and developments.
Where can I download the Knowunity app?
You can download the app in the Google Play Store and in the Apple App Store.
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The app is very easy to use and well designed. I have found everything I was looking for so far and have been able to learn a lot from the presentations! I will definitely use the app for a class assignment! And of course it also helps a lot as an inspiration.
Stefan S
iOS user
This app is really great. There are so many study notes and help [...]. My problem subject is French, for example, and the app has so many options for help. Thanks to this app, I have improved my French. I would recommend it to anyone.
Samantha Klich
Android user
Wow, I am really amazed. I just tried the app because I've seen it advertised many times and was absolutely stunned. This app is THE HELP you want for school and above all, it offers so many things, such as workouts and fact sheets, which have been VERY helpful to me personally.
Anna
iOS user
I think it’s very much worth it and you’ll end up using it a lot once you get the hang of it and even after looking at others notes you can still ask your Artificial intelligence buddy the question and ask to simplify it if you still don’t get it!!! In the end I think it’s worth it 😊👍 ⚠️Also DID I MENTION ITS FREEE YOU DON’T HAVE TO PAY FOR ANYTHING AND STILL GET YOUR GRADES IN PERFECTLY❗️❗️⚠️
Thomas R
iOS user
Knowunity is the BEST app I’ve used in a minute. This is not an ai review or anything this is genuinely coming from a 7th grade student (I know 2011 im young) but dude this app is a 10/10 i have maintained a 3.8 gpa and have plenty of time for gaming. I love it and my mom is just happy I got good grades
Brad T
Android user
Not only did it help me find the answer but it also showed me alternative ways to solve it. I was horrible in math and science but now I have an a in both subjects. Thanks for the help🤍🤍
David K
iOS user
The app's just great! All I have to do is enter the topic in the search bar and I get the response real fast. I don't have to watch 10 YouTube videos to understand something, so I'm saving my time. Highly recommended!
Sudenaz Ocak
Android user
In school I was really bad at maths but thanks to the app, I am doing better now. I am so grateful that you made the app.
Greenlight Bonnie
Android user
I found this app a couple years ago and it has only gotten better since then. I really love it because it can help with written questions and photo questions. Also, it can find study guides that other people have made as well as flashcard sets and practice tests. The free version is also amazing for students who might not be able to afford it. Would 100% recommend
Aubrey
iOS user
Best app if you're in Highschool or Junior high. I have been using this app for 2 school years and it's the best, it's good if you don't have anyone to help you with school work.😋🩷🎀
Marco B
iOS user
THE QUIZES AND FLASHCARDS ARE SO USEFUL AND I LOVE THE SCHOOLGPT. IT ALSO IS LITREALLY LIKE CHATGPT BUT SMARTER!! HELPED ME WITH MY MASCARA PROBLEMS TOO!! AS WELL AS MY REAL SUBJECTS ! DUHHH 😍😁😲🤑💗✨🎀😮
Elisha
iOS user
This app is phenomenal down to the correct info and the various topics you can study! I greatly recommend it for people who struggle with procrastination and those who need homework help. It has been perfectly accurate for world 1 history as far as I’ve seen! Geometry too!
Paul T
iOS user
The app is very easy to use and well designed. I have found everything I was looking for so far and have been able to learn a lot from the presentations! I will definitely use the app for a class assignment! And of course it also helps a lot as an inspiration.
Stefan S
iOS user
This app is really great. There are so many study notes and help [...]. My problem subject is French, for example, and the app has so many options for help. Thanks to this app, I have improved my French. I would recommend it to anyone.
Samantha Klich
Android user
Wow, I am really amazed. I just tried the app because I've seen it advertised many times and was absolutely stunned. This app is THE HELP you want for school and above all, it offers so many things, such as workouts and fact sheets, which have been VERY helpful to me personally.
Anna
iOS user
I think it’s very much worth it and you’ll end up using it a lot once you get the hang of it and even after looking at others notes you can still ask your Artificial intelligence buddy the question and ask to simplify it if you still don’t get it!!! In the end I think it’s worth it 😊👍 ⚠️Also DID I MENTION ITS FREEE YOU DON’T HAVE TO PAY FOR ANYTHING AND STILL GET YOUR GRADES IN PERFECTLY❗️❗️⚠️
Thomas R
iOS user
Knowunity is the BEST app I’ve used in a minute. This is not an ai review or anything this is genuinely coming from a 7th grade student (I know 2011 im young) but dude this app is a 10/10 i have maintained a 3.8 gpa and have plenty of time for gaming. I love it and my mom is just happy I got good grades
Brad T
Android user
Not only did it help me find the answer but it also showed me alternative ways to solve it. I was horrible in math and science but now I have an a in both subjects. Thanks for the help🤍🤍
David K
iOS user
The app's just great! All I have to do is enter the topic in the search bar and I get the response real fast. I don't have to watch 10 YouTube videos to understand something, so I'm saving my time. Highly recommended!
Sudenaz Ocak
Android user
In school I was really bad at maths but thanks to the app, I am doing better now. I am so grateful that you made the app.
Greenlight Bonnie
Android user
I found this app a couple years ago and it has only gotten better since then. I really love it because it can help with written questions and photo questions. Also, it can find study guides that other people have made as well as flashcard sets and practice tests. The free version is also amazing for students who might not be able to afford it. Would 100% recommend
Aubrey
iOS user
Best app if you're in Highschool or Junior high. I have been using this app for 2 school years and it's the best, it's good if you don't have anyone to help you with school work.😋🩷🎀
Marco B
iOS user
THE QUIZES AND FLASHCARDS ARE SO USEFUL AND I LOVE THE SCHOOLGPT. IT ALSO IS LITREALLY LIKE CHATGPT BUT SMARTER!! HELPED ME WITH MY MASCARA PROBLEMS TOO!! AS WELL AS MY REAL SUBJECTS ! DUHHH 😍😁😲🤑💗✨🎀😮
Elisha
iOS user
This app is phenomenal down to the correct info and the various topics you can study! I greatly recommend it for people who struggle with procrastination and those who need homework help. It has been perfectly accurate for world 1 history as far as I’ve seen! Geometry too!
Paul T
iOS user
Understanding the Accounting Equation: Notes for Beginners
Y
y
@yareuhere
Ever wonder how businesses keep track of their money and make sure everything balances out? The accounting equation is like the golden rule of business - it's the simple formula that helps companies understand exactly what they own, what they... Show more
The Foundation: Understanding the Accounting Equation
Think of the accounting equation as the backbone of every business - it's literally the foundation that keeps all financial records organized and balanced. This powerful formula shows two crucial things about any company: what it owns and what it owes to others.
The magic formula is Assets = Liabilities + Equity. Assets are the economic resources a business owns (like cash, equipment, or buildings). Liabilities represent the financial obligations or debts the business owes to others. Stockholder's equity (or owner's equity) shows the owner's claim on the business assets.
Here's how it works in real life: if a business has ₱90,000 in owner's equity and ₱30,000 in liabilities, then its total assets must equal ₱120,000. The equation always balances perfectly - that's what makes accounting reliable and trustworthy for business decisions.
Pro Tip: Remember that this equation must ALWAYS balance - if it doesn't, there's an error somewhere in your calculations!
Sign up to see the contentIt's free!
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Improve your grades
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The Five Major Account Types
Every business transaction involves five major account categories that you'll encounter constantly in accounting. Assets represent economic resources owned by the business, like cash, equipment, and inventory that provide future economic benefits.
Current assets can be converted to cash within one year (cash on hand, accounts receivable, inventories, unused supplies). Non-current assets stick around longer than a year (equipment, buildings, land). These classifications help businesses understand their liquidity and long-term investments.
The other major accounts include liabilities (what you owe), capital (owner's investment), income (money earned), and expenses (costs of doing business). Understanding these categories makes analyzing any business transaction much simpler.
Quick Check: If someone asks about a company's "economic resources," they're talking about assets - everything valuable the business owns and controls.
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Improve your grades
Join milions of students
By signing up you accept Terms of Service and Privacy Policy
Liabilities and Owner's Equity Explained
Liabilities are the economic obligations your business owes to others - basically, all the money you need to pay back. These debts come from past transactions and require you to give up economic benefits (usually cash) to settle them.
Just like assets, liabilities split into two main types. Current liabilities must be paid within one year (accounts payable, notes payable, loans payable). Non-current liabilities give you more breathing room - you don't have to pay these back for over a year.
Owner's equity represents the owner's interest in the business - it's their claim on company assets. This includes the original capital investment, plus any profits earned, minus any personal withdrawals. Think of it as the owner's "slice of the pie" in terms of business value.
Remember: Liabilities aren't necessarily bad - many successful businesses use debt strategically to grow and expand their operations.
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Revenue and Expenses: The Money Flow
Revenue is the money your business earns from its main operations - whether that's providing services, selling products, or earning professional fees. This includes service revenue, interest income, sales, and professional fees that flow into your business.
Expenses represent the costs you incur while generating that revenue. Common expenses include utilities, salaries, wages, taxes and licenses, cost of sales, and depreciation. These are the necessary costs of doing business.
Let's see this in action: when Many Integrity starts a transportation business with ₱500,000 cash investment, the accounting equation shows Assets (₱500,000 cash) = Liabilities (₱0) + Owner's Equity (₱500,000 M. Integrity, capital). Everything balances perfectly from day one.
Key Insight: Revenue increases owner's equity, while expenses decrease it - this is how businesses track whether they're making or losing money.
Sign up to see the contentIt's free!
Access to all documents
Improve your grades
Join milions of students
By signing up you accept Terms of Service and Privacy Policy
Tracking Business Transactions
Every business transaction affects the accounting equation, but the equation must always stay balanced. When Mr. Integrity buys three tricycles for ₱150,000 on credit, assets increase by ₱150,000 (tricycles) and liabilities increase by ₱150,000 (accounts payable).
Revenue transactions boost both assets and owner's equity. When cash of ₱16,000 comes in from passenger transportation, cash (asset) increases by ₱16,000 and transportation revenue (owner's equity) increases by the same amount.
Payment transactions move money between asset and liability accounts. Paying ₱100,000 to TRUST, Inc. decreases both cash (asset) and accounts payable (liability) by ₱100,000. When Ms. Integrity withdraws ₱10,000 for personal use, both cash and owner's equity decrease.
Reality Check: Every transaction tells a story - practice reading these stories to understand how businesses really operate day-to-day.
Sign up to see the contentIt's free!
Access to all documents
Improve your grades
Join milions of students
By signing up you accept Terms of Service and Privacy Policy
Putting It All Together
Business transactions continue throughout operations, and each one must maintain the accounting equation balance. Purchasing tables and chairs for ₱6,000 in cash simply shifts money from one asset (cash) to another asset (furniture) - total assets stay the same.
Expense transactions like paying ₱40,000 in employee salaries decrease both cash (asset) and owner's equity through salary expense. This reflects the cost of running the business and generating revenue.
After multiple transactions, you can summarize everything: total assets of ₱516,000 equal liabilities of ₱50,000 plus owner's equity of ₱466,000. The equation balances perfectly, proving all transactions were recorded correctly and giving confidence in the financial information.
Success Strategy: Always double-check that your equation balances after each transaction - this simple habit prevents major accounting headaches later!
We thought you’d never ask...
What is the Knowunity AI companion?
Our AI companion is specifically built for the needs of students. Based on the millions of content pieces we have on the platform we can provide truly meaningful and relevant answers to students. But its not only about answers, the companion is even more about guiding students through their daily learning challenges, with personalised study plans, quizzes or content pieces in the chat and 100% personalisation based on the students skills and developments.
Where can I download the Knowunity app?
You can download the app in the Google Play Store and in the Apple App Store.
Is Knowunity really free of charge?
That's right! Enjoy free access to study content, connect with fellow students, and get instant help – all at your fingertips.
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Most popular content in FABM
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Students love us — and so will you.
4.9/5
App Store
4.8/5
Google Play
The app is very easy to use and well designed. I have found everything I was looking for so far and have been able to learn a lot from the presentations! I will definitely use the app for a class assignment! And of course it also helps a lot as an inspiration.
Stefan S
iOS user
This app is really great. There are so many study notes and help [...]. My problem subject is French, for example, and the app has so many options for help. Thanks to this app, I have improved my French. I would recommend it to anyone.
Samantha Klich
Android user
Wow, I am really amazed. I just tried the app because I've seen it advertised many times and was absolutely stunned. This app is THE HELP you want for school and above all, it offers so many things, such as workouts and fact sheets, which have been VERY helpful to me personally.
Anna
iOS user
I think it’s very much worth it and you’ll end up using it a lot once you get the hang of it and even after looking at others notes you can still ask your Artificial intelligence buddy the question and ask to simplify it if you still don’t get it!!! In the end I think it’s worth it 😊👍 ⚠️Also DID I MENTION ITS FREEE YOU DON’T HAVE TO PAY FOR ANYTHING AND STILL GET YOUR GRADES IN PERFECTLY❗️❗️⚠️
Thomas R
iOS user
Knowunity is the BEST app I’ve used in a minute. This is not an ai review or anything this is genuinely coming from a 7th grade student (I know 2011 im young) but dude this app is a 10/10 i have maintained a 3.8 gpa and have plenty of time for gaming. I love it and my mom is just happy I got good grades
Brad T
Android user
Not only did it help me find the answer but it also showed me alternative ways to solve it. I was horrible in math and science but now I have an a in both subjects. Thanks for the help🤍🤍
David K
iOS user
The app's just great! All I have to do is enter the topic in the search bar and I get the response real fast. I don't have to watch 10 YouTube videos to understand something, so I'm saving my time. Highly recommended!
Sudenaz Ocak
Android user
In school I was really bad at maths but thanks to the app, I am doing better now. I am so grateful that you made the app.
Greenlight Bonnie
Android user
I found this app a couple years ago and it has only gotten better since then. I really love it because it can help with written questions and photo questions. Also, it can find study guides that other people have made as well as flashcard sets and practice tests. The free version is also amazing for students who might not be able to afford it. Would 100% recommend
Aubrey
iOS user
Best app if you're in Highschool or Junior high. I have been using this app for 2 school years and it's the best, it's good if you don't have anyone to help you with school work.😋🩷🎀
Marco B
iOS user
THE QUIZES AND FLASHCARDS ARE SO USEFUL AND I LOVE THE SCHOOLGPT. IT ALSO IS LITREALLY LIKE CHATGPT BUT SMARTER!! HELPED ME WITH MY MASCARA PROBLEMS TOO!! AS WELL AS MY REAL SUBJECTS ! DUHHH 😍😁😲🤑💗✨🎀😮
Elisha
iOS user
This app is phenomenal down to the correct info and the various topics you can study! I greatly recommend it for people who struggle with procrastination and those who need homework help. It has been perfectly accurate for world 1 history as far as I’ve seen! Geometry too!
Paul T
iOS user
The app is very easy to use and well designed. I have found everything I was looking for so far and have been able to learn a lot from the presentations! I will definitely use the app for a class assignment! And of course it also helps a lot as an inspiration.
Stefan S
iOS user
This app is really great. There are so many study notes and help [...]. My problem subject is French, for example, and the app has so many options for help. Thanks to this app, I have improved my French. I would recommend it to anyone.
Samantha Klich
Android user
Wow, I am really amazed. I just tried the app because I've seen it advertised many times and was absolutely stunned. This app is THE HELP you want for school and above all, it offers so many things, such as workouts and fact sheets, which have been VERY helpful to me personally.
Anna
iOS user
I think it’s very much worth it and you’ll end up using it a lot once you get the hang of it and even after looking at others notes you can still ask your Artificial intelligence buddy the question and ask to simplify it if you still don’t get it!!! In the end I think it’s worth it 😊👍 ⚠️Also DID I MENTION ITS FREEE YOU DON’T HAVE TO PAY FOR ANYTHING AND STILL GET YOUR GRADES IN PERFECTLY❗️❗️⚠️
Thomas R
iOS user
Knowunity is the BEST app I’ve used in a minute. This is not an ai review or anything this is genuinely coming from a 7th grade student (I know 2011 im young) but dude this app is a 10/10 i have maintained a 3.8 gpa and have plenty of time for gaming. I love it and my mom is just happy I got good grades
Brad T
Android user
Not only did it help me find the answer but it also showed me alternative ways to solve it. I was horrible in math and science but now I have an a in both subjects. Thanks for the help🤍🤍
David K
iOS user
The app's just great! All I have to do is enter the topic in the search bar and I get the response real fast. I don't have to watch 10 YouTube videos to understand something, so I'm saving my time. Highly recommended!
Sudenaz Ocak
Android user
In school I was really bad at maths but thanks to the app, I am doing better now. I am so grateful that you made the app.
Greenlight Bonnie
Android user
I found this app a couple years ago and it has only gotten better since then. I really love it because it can help with written questions and photo questions. Also, it can find study guides that other people have made as well as flashcard sets and practice tests. The free version is also amazing for students who might not be able to afford it. Would 100% recommend
Aubrey
iOS user
Best app if you're in Highschool or Junior high. I have been using this app for 2 school years and it's the best, it's good if you don't have anyone to help you with school work.😋🩷🎀
Marco B
iOS user
THE QUIZES AND FLASHCARDS ARE SO USEFUL AND I LOVE THE SCHOOLGPT. IT ALSO IS LITREALLY LIKE CHATGPT BUT SMARTER!! HELPED ME WITH MY MASCARA PROBLEMS TOO!! AS WELL AS MY REAL SUBJECTS ! DUHHH 😍😁😲🤑💗✨🎀😮
Elisha
iOS user
This app is phenomenal down to the correct info and the various topics you can study! I greatly recommend it for people who struggle with procrastination and those who need homework help. It has been perfectly accurate for world 1 history as far as I’ve seen! Geometry too!
Paul T
iOS user