Accounting Equation

Accounting Equation

The Accounting Equation

• Accounting is based upon a very simple idea known as the accounting equation.

  The equation is written as:

•              Assets = Liabilities + Capital

  
  

• Resources (what they are) = Resources (who supplied them)

The accounting equation highlights the assets that the business owns and how the business was able to acquire those assets – either through debt (liabilities) or contributions by the owner (capital).

Other forms of the accounting equation:

           Capital = Assets – Liabilities

           Liabilities = Assets – Capital

Therefore the accounting equation can be written in three forms:

• Assets     = Liabilities + Capital

• Capital    = Assets – Liabilities

• Liabilities = Assets – Capital

Open Ended

Exercise:

Assets= $12,500

Liabilities= $1,800

Find Capital.

No matter how you present the accounting equation the totals of both sides will always equal each other, and this will always be true no matter how many transactions there may be. The actual assets, capital and liabilities may change, but the total of the assets will always equal the total of Capital + Liabilities.