The Accounting Equation
THE ACCOUNTING EQUATION
The accounting equation can be described as of the basis of accounting. This is because it describes the double entry principle of book-keeping.
It is a representation of how funds are raised to finance Assets.
The equation is illustrated below:
Asset = Capital + Liabilities
For example, a girl needs to buy a laptop costing £500. She already had £250 in personal savings and then took a loan of £250 from her boyfriend.
Here is the equation again:
Asset Capital Liabilities
£500 (Laptop) = £250 (personal savings) + £250 (borrowings)
DOUBL E ENTRY BOOKKEEPING
Double entry bookkeeping describes the way transactions are recorded in accounting ledgers.
The system works by recording a transaction twice to maintain checks and balances.
For every debit entry, there is a corresponding credit entry. That is, for every transaction recorded on the left side (Debit), there will be a corresponding entry on the right side (credit).
Using the above example, the double entry will be like this:
DR CR £ £
Laptop 500
Capital 250
Liability 250
Total 500 500
To illustrate this using individual transactions
CAPITAL A/C
DR CR
Capital 250
LOAN A/C DR CR
Loan 250
ASSET A/C
DR CR
Laptop 500
FIXED ASSETS
Fixed assets are those assets of a company that have a useful life of more than one year.
Examples include land, building, motor vehicle and machinery.
CURRENT ASSETS
Current assets are those assets of a company that have a short useful life of less than one year.
Examples include cash, inventory, debtors and cash at bank.
CURRENT LIABILITIES
Current liabilities are the liabilities of a company falling due within one year.
Examples include trade creditors and bank overdraft.
TRADING AND PROFIT AND LOSS ACCOUNT
The trading and profit and loss account is a statement showing the trading activities of a business, the expenses incurred in the trading and the
The accounting equation can be described as of the basis of accounting. This is because it describes the double entry principle of book-keeping.
It is a representation of how funds are raised to finance Assets.
The equation is illustrated below:
Asset = Capital + Liabilities
For example, a girl needs to buy a laptop costing £500. She already had £250 in personal savings and then took a loan of £250 from her boyfriend.
Here is the equation again:
Asset Capital Liabilities
£500 (Laptop) = £250 (personal savings) + £250 (borrowings)
DOUBL E ENTRY BOOKKEEPING
Double entry bookkeeping describes the way transactions are recorded in accounting ledgers.
The system works by recording a transaction twice to maintain checks and balances.
For every debit entry, there is a corresponding credit entry. That is, for every transaction recorded on the left side (Debit), there will be a corresponding entry on the right side (credit).
Using the above example, the double entry will be like this:
DR CR £ £
Laptop 500
Capital 250
Liability 250
Total 500 500
To illustrate this using individual transactions
CAPITAL A/C
DR CR
Capital 250
LOAN A/C DR CR
Loan 250
ASSET A/C
DR CR
Laptop 500
FIXED ASSETS
Fixed assets are those assets of a company that have a useful life of more than one year.
Examples include land, building, motor vehicle and machinery.
CURRENT ASSETS
Current assets are those assets of a company that have a short useful life of less than one year.
Examples include cash, inventory, debtors and cash at bank.
CURRENT LIABILITIES
Current liabilities are the liabilities of a company falling due within one year.
Examples include trade creditors and bank overdraft.
TRADING AND PROFIT AND LOSS ACCOUNT
The trading and profit and loss account is a statement showing the trading activities of a business, the expenses incurred in the trading and the