Introduction to bookkeeping and accounting: 3 6 The accounting equation and the double-entry rules for income and expenses Open University


It is shown as the part of owner’s equity in the liability side of the balance sheet of the company. The accounting equation is also known as the balance sheet equation or the basic accounting equation. What if you print the balance sheet and the total of all assets do not match the total of all liabilities and shareholders’ equity?


In the accounting equation entry, Utility Expense has a debit balance of $300. This is posted to the Utility Expense T-account on the debit side. You will notice that the transactions from January 3 and January 9 are listed already in this T-account. The next transaction figure of $300 is added on the credit side. You can see at the top is the name of the account “Cash,” as well as the assigned account number “101.” Remember, all asset accounts will start with the number 1. The date of each transaction related to this account is included, a possible description of the transaction, and a reference number if available.

Sole Proprietorship Transaction #5.

The increase to assets would be reflected on the balance sheet. The increase to equity would affect three statements. The income statement would see an increase to revenues, changing net income . Examples of assets include cash, accounts receivable, inventory, prepaid insurance, investments, land, buildings, equipment, and goodwill.

  • We want to increase the asset Supplies and increase what we owe with the liability Accounts Payable.
  • In information technology terms, the ability of users to perform a specific task is known as functionality.
  • Full BioAmy is an ACA and the CEO and founder of OnPoint Learning, a financial training company delivering training to financial professionals.
  • The next transaction figure of $100 is added directly below the January 12 record on the credit side.
  • Company credit cards, rent, and taxes to be paid are all liabilities.

The account used to summarize the owner’s equity in a business. We want to increase the asset Cash and decrease the asset Accounts Receivable. The corporation paid $300 in cash and reduced what they owe to Office Lux.

6 The accounting equation and the double-entry rules for income and expenses

The change to liabilities will increase liabilities on the balance sheet. The accounting equation shows that ASI’s liabilities increase by $120 and the expense causes stockholders’ equity to decrease by $120. As you see, ASI’s assets increase by $10,000 and stockholders’ equity increases by the same amount. As a result, the accounting equation will be in balance. Although owner’s equity is decreased by an expense, the transaction is not recorded directly into the owner’s capital account at this time.

  • Had a total of $1,288,500,000 in stored value card liability.
  • The next activity should help you to understand the importance of both forms of the accounting equation.
  • In other words, a journal entry should have a minimum of at least one debit entry and one credit entry, and the total of those entries must be equal.
  • Created more than 500 years ago, the basic accounting equation continues to serve as the foundation of double-entry accounting.
  • Examples include land, natural resources such as timber or mineral reserves, buildings, production equipment, vehicles, and office furniture.

Therefore, the company has a liability to the customer to provide the service and must record the liability as unearned revenue. The liability of $4,000 worth of services increases because the company has more unearned revenue than previously. We now analyze each of these transactions, paying attention to how they impact the accounting equation and corresponding financial statements. The purchase of its own stock for cash meant that ASI’s assets decrease by $100 and its stockholders’ equity decreases by $100.

What Is the Accounting Equation, and How Do You Calculate It?

In Accounting, Business and Society – we will delve into using Debits and Credits to record these transactions as accountants would. However, this introductory textbook focuses on developing a general understanding of accounting. We will discuss changes in our assets, liabilities and owner’s equity as increases or decreases to those accounts.