The accounting equation
The foundation for double entry bookkeeping
A basic concept in accounting is that every business transaction will impact two elements of a simple equation which is known as the accounting equation.
The accounting equation is shown in the diagram below:
This is known as the double entry system, but more on that in a later unit.
For now consider this situation:
Owners (Shareholders) decide to invest £2000 in a new enterprise. The accounting equation would look like this:
The same business then buys machinery (for £1000) and materials (For £200):
Finally if the business buys some more material for £500, but for the moment does not pay for it, i.e. it owes the supplier, the equation would look like this:
This basic equation is turned in to a document that:
- At a specific date (point in time)
- Identifies the detail items in the equation
This is called a BALANCE SHEET
You may like to try to work through some additional equations; these together with the answers can be down loaded from the link
Further Accounting Equation Examples – Adobe PDF format.
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