Unit 4 : The Accounting Equation

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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:

Finance course- Unit4_Artboard 4

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:

Finance course- Unit4_Artboard 4-05

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

Finance course- Unit4_Artboard 4-06

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:

Finance course- Unit4_Artboard 4-07

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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