The accounting equation

The foundation for double entry bookkeeping

Unit 3

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.


1st May 2019

The right tool for the job

Charities face the same regulatory pressures as commercial organisations but, in addition, must also deal with complex sector-specific reporting requirements intended to demonstrate good stewardship to supporters and regulators alike.

1st January 2019

VAT Refund Scheme

HMRC has updated VAT Notice 1001 on the VAT Refund Scheme for qualifying charities.

1st April 2016

Dividend Allowance

From 6th April 2016 the Dividend Tax Credit will be replaced by a new, tax-free, Dividend Allowance. The new Dividend Allowance means that you won't have to pay tax on the first £5,000 of your dividend income.