The first thing that anyone who is new to accounting should learn is the accounting equation. In this article in our accounting 101 series, I will be providing a very concise answer to the question ‘what is accounting equation?’ in such a way that anyone can understand it without putting in much efforts.
A lot of people snap when they hear the word ‘equation’ in any phrase. They think that anything called an equation must be hard.
Well, accounting equation is about to prove you wrong if you are one of those people who think that the concept of accounting equation must be hard.
This is going to be a very short article that explains what an accounting equation is. Please feel free to read other related articles listed below as they will enhance your understanding of this simple post:
How to make a journal entry and What is a ledger in accounting
Let’s start by looking at the definition of an accounting equation before we explore the concept further in this article.
What is accounting equation?
An accounting equation is a formulaic way of expressing the relationships between the assets, liabilities and owners’ equity in the statement of financial position. The accounting equation also confirms the equality of resources brought into the business by the owners and the resources that currently exist in the business.
The accounting equation is expressed as: Assets = Liabilities + Owners’ Equity. This is the same thing as saying: Resources brought into the business by owners = Current resources that exist in business at a particular date. This simply means that an organization’s asset is equal to the claims over the assets at any point in time.
The accounting equation is the foundation upon which financial accounting as a whole is built on. The accounting equation holds true regardless of how it is arranged or the circumstances prevailing in any given business. The size of the business and the number of transactions also makes no difference to the outcome of accounting equation.
Variants of accounting equation
|Circumstance||Applicable Accounting Equation|
|Where a business does not owe anybody (very rare but possible)||Assets = Capital|
|Where a business has some liabilities||Assets = Capital + Liabilities|
|When netting off asset against liabilities||Net Asset = Capital|
|Rearranging to original accounting equation||Assets – Liabilities = Capital|
Make sure you are comfortable with the above table as this will help you easily figure out a missing figure especially when dealing with incomplete records.
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