Post on 16-Jul-2015
Lesson 6: The Accounting Equation
© KayOne Education, 2015
The Accounting Equation
107 28
79
What you own
What you owe
What belongs to you
Assets
Equity
Liabilities
© KayOne Education, 2015
The Accounting Equation
Assets Equity Liabilities + What you own Owner’s Claim What you owe
=
Capital + Profits Cash + Property + Equipment Loan + Payables
© KayOne Education, 2015
The Accounting Equation
= + Assets Equity Liabilities
Starting business with cash of $20,000
Cash Capital
20,000 20,000
© KayOne Education, 2015
The Accounting Equation
= + Assets Equity Liabilities
Purchase equipment for $30,000 by taking a bank loan
Cash Capital
20,000 20,000
Equipment Loan
50,000 30,000
© KayOne Education, 2015
The Accounting Equation
= + Assets Equity Liabilities
Purchase inventory on credit for $4,000
Cash Capital
20,000
Equipment Loan
30,000 50,000
Inventory
54,000
Supplier
34,000
© KayOne Education, 2015
The Accounting Equation
= + Assets Equity Liabilities
Cash Capital
20,000
Equipment Loan
Supplier
54,000 34,000
Profit
45,000
Cash
64,000
Customer Inventory
79,000
During a month you make sale of $25,000 of which $10,000 is collected in cash and the balance is receivable from customers
© KayOne Education, 2015
The Accounting Equation
= + Assets Equity Liabilities
Cash Capital
Equipment Loan
Creditors
34,000
Profit
Debtors Inventory
Cash
79,000 45,000 30,000 75,000
You pay off your creditors of $ 4,000 using the cash that you have
Summary
The Accounting Equation
• The accounting equation states that: Assets = Equity + Liabilities
• The equation is a representation of the Balance Sheet
• The equation always balances
• It is for this reason that a Balance Sheet always ‘balances’
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