Acc equation

Amity Business School

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Amity Business SchoolBBA, I semester

Financial Accounting -I

Nupur Agarwal


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Accounting EquationFive groups of accounts

■ Assets are items of value owned/controlled by a business; examples are cash, inventories, buildings and motor vehicles.

■ Liabilities are amounts owed to people or to organisations outside of the business; examples are amounts owed to Creditors control for purchases, or to a bank for a loan, overdraft or mortgage.

■ Equity is represented by the business’s assets less its liabilities (or the amount that the business owes to the owner). Equity is the amount originally invested in a business plus extra cash introduced, plus profits and less losses and drawings of cash or inventories from the business by the owner.


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■ Revenue items are the earnings of a business; examples are income from sales of trading stock, interest, commission, rent and discount received.

■ Expenses are outflows from a business; examples are payment for wages or salaries, purchases of trading stock, payments for advertising, freight, motor vehicles expenses and discount allowed.


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Accounting equation

• The financial position of a company is measured by the following items:

• Assets (what it owns)• Liabilities (what it owes to others)• Owner’s Equity (the difference between assets and liabilities)• The accounting equation (or basic accounting equation)

offers a simple way to understand how these three amounts relate to each other.


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• The Accounting Equation can be presented as:Assets − Liabilities = Equity. By simple transposition the Accounting Equation can also be shown as: 1. Assets = Liabilities + Equity (A = L + EQ)2. Assets − Equity = Liabilities (A − EQ = L).


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• If a company keeps accurate records, the accounting equation will always be “in balance,” meaning the left side should always equal the right side. The balance is maintained because every business transaction affects at least two of a company’s accounts.

• For example, when a company borrows money from a bank, the company’s assets will increase and its liabilities will increase by the same amount. When a company purchases inventory for cash, one asset will increase and one asset will decrease. Because there are two or more accounts affected by every transaction, the accounting system is referred to as double entry accounting.

• A company keeps track of all of its transactions by recording them in accounts in the company’s general ledger. Each account in the general ledger is designated as to its type: asset, liability, owner’s equity, revenue, expense, gain, or loss account.

http://www.accountingcoach.com/terms/D/double-entry-accounting.html

http://www.accountingcoach.com/terms/G/general-ledger.html


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Practice Example


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Acc equation

Business

Transcript of Acc equation