The Basic Accounting Equation

Basic accounting equation

Provides the Underlying framework for recording and summarize

economic events .
Assets must be equal to the sum of liabilities and equity .

Assets = Liabilities + Equity

= +
Assets Liabilities Equity

Assets Liabilities Equity

Resources a Claims against assets (debts Ownership claims on
business owns. and obligations). Total assets.
Provide future
Creditors (party to whom Referred to as
services or
money is owed). residual Equity.
benefits.
Accounts Payable, Notes Share Capital-
Cash, Inventory,
Payable, Salaries and Ordinary and
Equipment, etc.
Wages Payable, etc. retained Earnings .

Equity and it's relationships

Equity

Increases Increases Decreases Decreases

Investment by Shareholders Revenue Dividends to Shareholders Expenses

 Investment by Shareholders Increases Equity. It represents the total
amount paid in by shareholders for the ordinary shares they purchase.
Revenues Increases Equity . They are results from business
activities entered into for the purpose of earning money. Common
sources of revenue are: sales, fees, services, commissions, interest,
dividends, royalties, and rent.
Expenses Decreases Equity, they are the cost of assets consumed
or services used in the process of earning revenue. Common
expenses are: salaries expense, rent expense, utilities expense,
property tax expense, etc.
Dividends Decreases Equity, They are the distribution of cash or
other assets to shareholders. Dividends reduce retained earnings.
However, dividends are not expenses.

Next section : Using The Accounting Equation