Accounting Equation Overview, Formula, and Examples

Accounting Equation Overview, Formula, and Examples

Accounting Equation Overview, Formula, and Examples
Accounting Equation Overview, Formula, and Examples


The difference here is that a note typically includes interest and specific contract terms, and the amount may be due in more than one accounting period. Cash includes paper currency as well as coins, checks, bank accounts, and money orders. Anything that can be quickly liquidated into cash is considered cash. Cash activities are a large part of any business, and the flow of cash in and out of the company is reported on the statement of cash flows. It is a kind of document that is integral to accounting for its function as the financial statement reporting a business organisation’s shareholder equity, assets, and liabilities. Journal entries often use the language of debits and credits . A debit refers to an increase in an asset or a decrease in a liability or shareholders’ equity.

When supplies are bought on account, the business to whom money is owed is ____. When a transaction changes only one side of the equation, if one account is increased, the other account on the same side must ____. The account used to summarize the owner’s equity in a business is ____.

If total liabilities decreased by $46,000 during

In this, it is easier to highlight the relationship between shareholder’s equity and debt . As you can see, shareholder’s equity is the remainder after liabilities have been subtracted from assets. This is because creditors – parties that lend money such as banks – have the first claim to a company’s assets. In general, assets are something of value to the company but usually when we think of assets we think of current and fixed assets. However, in the accounting equation we should also take longterm and intangible assets into consideration as they all fall into the category of assets and thus add value to an entity.

  • Both FASB and IASB cover the same topics in their frameworks, and the two frameworks are similar.
  • Some common examples of liabilities include accounts payable, notes payable, and unearned revenue.
  • Get all the important information related to the CA Foundation Exam including the process of application, important calendar dates, eligibility criteria, exam centers etc.
  • Accounting Principle is general law or rule followed in the preparation of financial statements.
  • The account used to summarize the owner’s equity in a business is ____.
  • This then allows them to predict future profit trends and adjust business practices accordingly.

That’s the case for each transaction and journal entry. As a result, the financial statements are in balance. So, now you know how to use the accounting formula and what it does for your books. But why is it essential for your bookkeeping? The accounting equation is important because it can give you a clear picture of your business’s financial situation.

and Companies registered under the Indian Companies Act 1956 d Non Banking

The company’s assets are equal to the sum of its liabilities and equity. The income and retained earnings of the accounting equation is also an essential component in computing, understanding, and analyzing a firm’s income statement. This statement reflects profits and losses that are themselves determined by the calculations that make up the basic accounting equation. In other words, this equation allows businesses to determine revenue as well as prepare a statement of retained earnings.

  • Current liabilities are short-term financial obligations payable in cash within a year.
  • The dividend could be paid with cash or be a distribution of more company stock to current shareholders.
  • Refers to the owner’s (stockholders’) investments in the business and earnings.
  • The concept of equity does not change depending on the legal structure of the business .
  • This is the total value of an organisation that is expressed as dollars.
  • These drawings reduce the owner’s equity in the entity.

In a corporation, represents the stockholders’ equity. Thus, the accounting formula essentially shows that what the firm owns has been purchased with equity and/or liabilities. The accounting equation formula is based on the double-entry bookkeeping and accounting system.


Represents a customer’s advanced payment for a product or service that has yet to be provided by the company. Since the company has not yet provided the product or service, it cannot recognize the customer’s payment as revenue, according to the revenue recognition principle. Thus, the account is called unearned revenue. The company owing the product or service creates the liability to the customer. Inventory refers to the goods available for sale. Service companies do not have goods for sale and would thus not have inventory.