The Accounting Equation

1. The Accounting Equation Assets = Liabilities + Owner’s Equity Assets – Liabilities = Owner’s Equity

2. The Accounting Equation • The equation must be in balance. • If there is an increase to the left side the right side must increase as well. • Or an increase to the left side could cause a decrease in another account on the left side.

3. Assets = Liabilities + Owner’s Equity • Shift in assets: A shift that occurs when the composition of the assets has changed, but the total of the assets remains the same. • Example: • Cash is used to purchase inventory. • Both are assets – the composition has changed but the total of assets is still the same.

4. Assets = Liabilities + Owner’s Equity + Revenue • Revenue: An amount earned by performing services for customers or selling goods to customers; it can be in the form of cash and/or accounts receivable. A subdivision of owner’s equity: as revenue increases, owner’s equity increases.

5. Assets = Liabilities + Owner’s Equity - Expense • Expense: A cost incurred in running a business by consuming goods or services in producing revenue; a subdivision of owner’s equity. When expenses increase, there is a decrease in owner’s equity.

6. Assets = Liabilities + Owner’s Equity + Capital – Withdrawals • Capital:The owner’s investment of equity in the company. • Withdrawals:A subdivision of owner’s equity that records money or other assets an owner withdraws from a business for personal use.

7. Assets + Accounts Receivables = Liabilities + Accounts Payable + Owner’s Equity • Accounts Payable: Amounts owed to creditors that result from the purchase of goods or services onaccount: a liability. • Accounts Receivable: An asset that indicates amounts owed by customers.

8. Assets = Liabilities + Owner’s Equity & beyond • Review • When you increase your assets • You increase your Owner’s Equity • You have affected two accounts: Assets & Owner’s Equity • The equation is in balance • This is double-entry bookkeeping