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

August 2023
Operations
The importance of budgeting

Are you a small business or charity? Discover why you need a budget to thrive and make lasting change. Learn the essentials now!

Updated August 2023
Charity
Receipts & payments vs accrual accounting

Charities with a gross income below £250,000 and who are not registered as a company have the option of preparing receipts and payments accounts, as long as their governing document does not require their charity's annual accounts to be prepared as accruals accounts.

Updated August 2023
Payroll
Simplify employee cost allocation

Employee cost allocation is the process of distributing staff costs across various aspects of a business. This helps in understanding how employees are used in different projects, allowing for accurate budgeting, enabling full costing for projects and better management control.