2 The accounting equation

Lesson objectives

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 Assets, liabilities and owner’s
equity
•

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 Owners resources as an
equation.

• Owner’s equity (resources supplied by the owner) = Assets

(resources owned by the business)
• Other people other than the owner (bank, creditors) can
supply resources to the business.
• These are the liabilities of a business.
• A liability is a debt or obligation owed to lenders or
suppliers.
 The accounting equation
• When the business acquires a liability, the equation is altered to:
• Owner’s equity = Assets – Liabilities.
• This is called the accounting equation.
• If we modify the equation:
• Assets = Owner’s equity + Liabilities
• Or
• Liabilities = Assets - Owner’s equity.
The double entry system of book-
keeping
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The statement of financial position will
look like this:
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