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| Cash withdrawn by the owner | – | – | |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.