The accounting equation table below acts as a quick reference to help show you the effects of typical start-up business transactions on the fundamental accounting equation. The table is based on the formula for the basic accounting equation as follows:
In this table, we will explore each element of the accounting equation and its relationship to the other two.
The Accounting Equation Table Guide and Key
- Transaction: Each row represents a business transaction typical used when starting a business.
- Assets: The assets part of the basic accounting equation. Assets refer to any resources that a business owns or controls, such as cash, inventory, equipment, and property.
- Liabilities: The liabilities part of the basic accounting equation. Liabilities are the debts and obligations that a business owes to others, such as loans, accounts payable, and taxes.
- Equity: The equity part of the accounting equation, which includes capital and reserves. Equity represents the residual value of a business’s assets after liabilities are subtracted, and it can be either owner’s equity or shareholder’s equity.
- + The item is increased due to the transaction.
- – The item is decreased due to the transaction.
- + /- One item is increased and another is decreased due to the transaction.
| Transaction | Assets | Liabilities | Equity |
|---|---|---|---|
| Injection of capital by owner | + | + | |
| Property provided by owner | + | + | |
| Office equipment purchased with cash | + / – | ||
| Equipment purchased on account | + | + | |
| Equipment sold | + / – | ||
| Supplier account payment made | – | – | |
| Revenue for cash sale received | + | + | |
| Expense paid by cash | – | – | |
| Cash withdrawn by the owner | – | – | |
| Cash received from an account customer | + / – | ||
| Loan is taken from a bank | + | + | |
| Expenses incurred on account with a supplier | + | – | |
| Loan repayment is made with cash | – | – |
Conclusion
In conclusion, the accounting equation is a fundamental concept in accounting that is used to understand and analyze the financial position of a business. The table shown above can be used as a reference to aid understanding of how typical bookkeeping transactions affect the accounting equation.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.