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Karan
Karan
In: 1. Financial Accounting > Accounting Terms & Basics

What is accounting equation with examples?

What is accounting equation with examples?
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    1 Answer

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    1. Manvi Pursuing ACCA
      2021-08-17T13:27:11+00:00Added an answer on August 17, 2021 at 1:27 pm
      This answer was edited.

      The accounting equation represents the relationship between assets, capital, and liabilities of a business. It follows the concept of the double-entry bookkeeping system where every debit has an equal credit. The rules state that at any time a business’ assets should equal liabilities. This is also known as the statement of financial position equation.

      The accounting equation can be shown as follows:

        Assets = Capital + Liabilities

      For example, Liza starts a business by investing $3,000 as cash. In accounting terms, business and owner are separate and so business owes money to Liza as capital.

      In this example,

      Capital invested = $3,000

      Cash (Asset) = $3,000

      If Liza puts this into the accounting equation, it will be shown as:

      Assets = Capital + Liabilities
      $3,000 (Cash) = $3,000 + Liabilities

      Further, Liza purchases a market stall from Ben and the cost of the stall was $1,800. She purchases flowers from the wholesale market at a cost of $700. Now she is left with $500 cash out of the original $3,000.

      The state of her business has now changed and can be shown as follows:

      Assets = Capital + Liabilities
      Stall        $1,800 $3,000 + Liabilities
      Flowers     $700
      Cash         $500
                       $3,000 $3,000
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