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.

1. = ++ +
=
The Accounting Equation

3. What is accounting?
 The process or work of keeping financial records.

4. What is an equation?
 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 owners equity?
 The owner’s claim on assets.

8. Income and expenses effect 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 that you know the differences . . .
. . . let us put the pieces together

11. Procedure to prepare accounting
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. Example:

13. Transaction 1:
Mr Riaz commences 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).