accounting equation

accounting equation

LEARNING OBJECTIVE 3

Understand the accounting

equation process of the

double-entry system of recording

The accounting equation – process of double entry

• The accounting equation is known as the

relationship between assets (whether

owned or controlled by the entity)

liabilities and equity (A = L + E)

• Liabilities and equity represent the claims

against the entity’s assets

The accounting equation – process of double entry cont

• Business transactions are analysed

by examining the dual effect of each business transaction and the impact

on the accounting equation (Assets

= Liabilities + Equity).

The accounting equation –

process of double entry cont

• The concept of duality simply means

that every business transaction will affect the accounting equation – the result of which leaves the equation

in balance!

The accounting equation –

process of double entry cont

• The Equity section of the accounting

equation can be expanded to analyse

the effects of income and expenses –

determines net profit/loss for the period

• Net profit/loss is then added to the entity’s

opening equity in the equity section of the Balance Sheet

LEARNING OBJECTIVE 4

Illustrate the impact of business transactions on the accounting

equation.

Business transactions on the

accounting equation

Transactions normally change both sides of the accounting equation but can also just affect one side

– e.g Entity buys car for cash –

– Bank (asset) decreases and vehicle

(asset) increases