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Lecture notes

Accounting Equation
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The accounting equation captures the relationship between the three components of a balance sheet: assets, liabilities, and equity. All else being equal, a company's equity will increase when its assets increase, and vice-versa.

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  • March 4, 2023
  • 2
  • 2021/2022
  • Lecture notes
  • Bindhu
  • All classes

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Accounting Equation

• The whole of financial accounting is based upon this very simple idea.
• Capital = Assets
• CAPITAL = ASSETS – LIABILITIES
• Assets=Capital + Liabilities

Examples
1. Owner of the business has supplied all of the resources

Resources supplied by the owner = Resources in the business
CAPITAL = ASSETS

Usually, however, people other than the owner have provided some of
the assets e.g. suppliers
Therefore:
Assets = Capital + Liabilities
Resources: what they are = Resources: who supplied them
(Assets) (Capital + Liabilities)


ASSETS = CAPITAL
Bank £60,000 = £60,000

2. Purchase of an asset
ASSETS = CAPITAL

Shop £32,000
Bank £28,000 =
£60,000 = £60,000

3. Example 3 – Incurring of liability
Computer bought but to be paid for later
ASSETS - LIABILITIES = CAPITAL

Shop £32,000
Computer. £2,000
Bank £28,000
£62,000 - £2,000 = £60,000
The £2,000 is a Liability known as a creditor

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