PRESENTED TO SIR MEHMOOD

PRESENTED BY FAIZA FAIZ(ROLL NO 055)

 ACCOUNTING
Accounting EQUATION
equation

 Accounting equation describes that the total

value of assets of a business is always equal to its
liabilities plus owner’s equity. This equation is
the foundation of modern 
double entry system of accounting being used by
small proprietors to large multinational
corporations. Assets = liabilities
+ owner’s equity
 DEFINITION AND EXPLANATION

Assets = Liabilities + Owner’s Equity

 The left hand side (also known as assets side) of
the equation shows the resources owned by
the business and the right hand side (also known
as equity side) shows the sources of funds used to
acquire the resources
 CONTD…

 In accounting equation, the liabilities are

normally placed before owner’s equity because
the rights of creditors are always given a priority
over the rights of owners. Because of this
preference, the liabilities are sometime
transposed to the left side which results in the
following form of accounting equation:
 Assets – Liabilities =  Owner’s Equity
 EXAMPLE

1 Assets = $50,000, Liabilities = $20,000, Owner’s

equity = ?
 SOLUTION

Owner’s equity = Assets – Liabilities

= $50,000 – $20,000
= $30,000
 CONTD…

 Assets = ?, Liabilities = $10,000, Owner’s equity

= $15,000
 SOLUTION

Assets = Liabilities + Owner’s equity

= $10,000 + $15,000
= $$25,000
 THE ACCOUNTING EQUATION IN
ACTION

 An example of how the three values relate: If a

business wishes to purchase a new asset, such as
computer equipment that costs £300, the purchase
can be made using cash (an asset), with owner
equity (earnings or funds) or with a liability (such
as borrowed money). If a liability is used for the
purchase, the £300 can then be paid off using assets
or with the use of a new liability, such as a bank
loan.