The accounting equation Accounting and Accountability

expanded accounting equation

This s the receivables account by $6,000 and increases the income account by $6,000. This increases the inventory account as well as the payables account. This increases the cash account as well as the capital account. Using Apple’s 2022 earnings report, we can find all the information we need to fill in the accounting equation. The new corporation purchased new asset for $8,500 and paid cash.

The accounting equation shows how a company’s assets, liabilities, and equity are related and how a change in one typically results in a change to another. In the accounting equation, assets are equal to liabilities plus equity. The accounting equation helps to assess whether the business transactions carried out by the company are being accurately reflected in its books and accounts.

Accounting Equation Explained

In this article, we’ll look at, liabilities and owner’s (or shareholders’) equity to help you learn the fundamental accounting equation. The accounting equation is fundamental to the double-entry accounting system and, put simply, it states that the assets of a business must equal its liabilities & owner’s equity. Similarly, when a company takes out a business loan, the borrowed money leads to an increase in assets. At the same time, this increases the company’s liability in the form of debt.


Eventually that debt must be repaid by performing the service, fulfilling the subscription, or providing an asset such as merchandise or cash. Some common examples of liabilities include accounts payable, notes payable, and unearned revenue. As you can see, all of these transactions always balance out the accounting equation. Assets will always equal liabilities and owner’s equity.

Sell Goods on Credit

The monthly is a listing of account names from the chart of accounts with total account balances or amounts. Total debits and credits must be equal before posting transactions to the general ledger for the accounting cycle.

  • Sally’s purchase increased her inventory account while also increasing her accounts payable account, keeping her accounting equation in balance.
  • Beginning inventory is how much inventory you have on hand at the beginning of the period.
  • Let’s take a look at certain examples to understand the situation better.
  • Why do accountant include short-term unearned revenues as current liabilities?

Calculating the total assets on the balance sheet for the period of consideration. An accounting equation is a principal component of the double-entry accounting system and forms part of a balance sheet. When building up a financial statement, the most basic way to do it is by leveraging a technique called an accounting equation. Describe how the paid-for utilities used in the business affects the three elements of the accounting equation. Explain the elements of the balance sheet, their purposes, and how to measure them. Also, explain the elements and purpose of the statement of changes in stockholders’ equity.

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