The Accounting Equation

Assets = Liabilities + Owners Equity

Assets Liabilities = Owners Equity

The Accounting Equation

The equation must be in balance. If there is an increase to the left side the right side must increase as well. Or an increase to the left side could cause a decrease in another account on the left side.

Assets = Liabilities + Owners Equity

Shift in assets: A shift that occurs when the composition of the assets has changed, but the total of the assets remains the same.

Example: Cash is used to purchase inventory. Both are assets the composition has changed but the total of assets is still the same.

Assets = Liabilities + Owners Equity + Revenue

Revenue: An amount earned by performing services for customers or selling goods to customers; it can be in the form of cash and/or accounts receivable. A subdivision of owners equity: as revenue increases, owners equity increases.

Assets = Liabilities + Owners Equity - Expense

Expense: A cost incurred in running a business by consuming goods or services in producing revenue; a subdivision of owners equity. When expenses increase, there is a decrease in owners equity.

Assets = Liabilities + Owners Equity + Capital Withdrawals

Capital: The owners investment of equity in the company. Withdrawals: A subdivision of owners equity that records money or other assets an owner withdraws from a business for personal use.

Assets + Accounts Receivables = Liabilities + Accounts Payable + Owners Equity

Accounts Payable: Amounts owed to creditors that result from the purchase of goods or services on account: a liability. Accounts Receivable: An asset that indicates amounts owed by customers.

Assets = Liabilities + Owners Equity & beyond

Review

When you increase your assets You increase your Owners Equity You have affected two accounts: Assets & Owners Equity The equation is in balance This is double-entry bookkeeping