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:

unit-03-1

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:

unit-03-3

The same business then buys machinery (for £1000) and materials (For £200):

unit-03-2

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:

unit-03-4

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.



LATEST NEWS

July 2021
Charity
Banding method VAT scheme for churches and cathedrals

Cathedrals and churches that have commercial operations that enable them to reclaim VAT will use the banding method, also known as apportionment of tax by cathedrals and churches.

January 2021
Charity
Fund accounting basics

Types of funds and examples of how the best to approach managing them. Fund accounting and reporting is a unique requirement for not-for-profit organisations and is one of the differences between charity and commercial business financial reporting.

December 2020
Charity
Cloud accounting and payroll software for charities

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.