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The accounting equation
The accounting equation shows that assets and liabilities of a company are equal. It is based on the dual concept that every transaction has two effects - a debit and a credit. Assets are possessions that result in economic resources flowing into the business, while liabilities are debts that result in outflows. Owners' equity represents the owners' claim on assets. To prepare an accounting equation, transactions are analyzed in terms of their impact on assets, liabilities, expenses and owners' equity, and the relevant accounts are adjusted. An example shows a business owner investing cash, increasing both the asset and owners' equity accounts by the same amount.
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The accounting equation
- 1. = ++ + = TheAccounting Equation
- 3. What is accounting? The process or work of keeping financial records.
- 4. What is anequation? The process of equating one thing with another.
- 5. Accounting equation is therefore: A mathematical expression which shows that assets and liabilities of a company are equal. It is based on the dual concept in accounting, that every transaction has two effects: a debit and credit. Every transaction affects two accounts.
- 6. What are assets? Possessions of the business. This will result in an inflow of economic resources to the business.
- 7. What is ownersequity? The owner’s claim on assets.
- 8. Income and expenseseffect on owner’s equity
- 9. What are liabilities? Debt the business incurs This will result in an outflow of economic resources from the business.
- 10. Now thatyou know the differences . . . . . . let us put the pieces together
- 11. Procedure to prepareaccounting equations: Analyse the transaction in terms of assets, liabilities, capital, expenses. Decide the effect of the transaction in terms of increase or decrease on the variables above. Record the affect on the relevant side of the equation.
- 12.
- 13. Transaction 1: Mr Riazcommences his business with cash R50,000. This is an example of investment of asset in the business by the owner. The effect of this transaction on the accounting equation is that cash asset is increased by R50,000 and the proprietorship (Riaz’s capital) is also increased by the same amount such as: Note that assets and equities increased by equal amounts
- 14. References: Fahad. M.(2015). Accounting-lesson 2: the accounting equation. Available from slideshare at https://www.slideshare.net/mobile/fahadmohiz/accounting-equation- presentation?utm_source=slideshow&utm_medium=ssemail&utm_c ampaign=download_notification (Accessed 8 September 2017) Sims. L. (2001). The accounting equation. Available from slideshare at https://www.slideshare.net/mobile/ldsims2001/the-accounting- equation- 12973407?utm_source=slideshow&utm_medium=ssemail&utm_ca mpaign=download_notification (Accessed 8 September 2017) Harjeet1984 (2010) accounting equation. Available from slideshare at https://www.slideshare.net/mobile/Harjeet1984/accounting- equation (Accessed 8 September 2017)
- 15. References continued Douza.E. (2014). Accounting equation. Available from slideshare at https://www.slideshare.net/mobile/ericadsouza7/accounting-equation- 39062232 (Accessed 8 September 2017). Wnghng. (2015). the accounting equation. Available from slideshare at https://www.slideshare.net/mobile/wnghng/the-accounting-equation- with-examples (Accessed 8 September 2017).