The accounting equation states that assets must always equal the sum of capital and liabilities. It is the fundamental concept in accounting that the resources (assets) of a business are supplied by either its owners (capital) or others it owes (liabilities). Assets represent the resources owned, capital represents the owners' claim to assets, and liabilities represent amounts owed to non-owners. The equation must always balance, as it reflects two ways of looking at the same financial position of a business. Examples are given to illustrate how transactions affect the components of the equation while maintaining the balance.

1. THE ACCOUNTING EQUATION

2. THE ACCOUNTING EQUATION
•The whole of financial accounting is
based on this simple idea
•It is the foundation of accounting

3. THE ACCOUNTING EQUATION
ASSETS CAPITAL LIABILITIES

4. ASSETS = CAPITAL + LIABILITIES
Assets can be thought of as the resources or the “stuff”
required in order to set up and run the business
Assets can consist of:
ASSETS
BUILDINGS MACHINERY STOCK
AMOUNTS OWING
FROM CUSTOMERS

5. ASSETS = CAPITAL + LIABILITIES
• Capital can be thought of as the amount of those resources
or assets supplied by the owner of the business
• Capital may also be referred to as OWNERS EQUITY
CAPITAL

6. • If the owner of the business has supplied all the resources
initially to start up the business then the equation will be;
CAPITAL
ASSETS LIABILITIES

7. ASSETS = CAPITAL + LIABILITIES
• IF RESOURCES OF THE BUSINESS HAVE BEEN SUPPLIED BY SOMEONE OTHER
THAN THE OWNER, THEN AMOUNTS OWING TO THESE OTHER PEOPLE IN
RESPECT OF THOSE RESOURCES SUPPLIED ARE REFERRED TO AS LIABILITIES
• Liabilities can include:
LIABILITIES
LOANS
AMOUNTS
OWING TO
SUPLIERS
AMOUNTS
OWING FOR
EXPENSES

8. ASSETS CAPITAL LIABILITIES
ACTUAL
RESOURCES/
STUFF IN THE
BUSINESS
WHO HAS CLAIMS TO THOSE ASSETS
OR RESOURCES IN THE BUSINESS
– WHO SUPPLIED THEM?
THIS WILL INCLUDE BOTH THE OWNERS
CLAIMS AND OTHER PEOPLES CLAIMS

9. ASSETS = CAPITAL + LIABILITIES
• The accounting equation should always balance.
• This is because we are looking at the same thing but from
two different places or points of view.
• Therefore, no matter how many transactions occur, both
sides of the equation should always balance.

10. ACCOUNTING EQUATION
EXAMPLE
• If on the 1/1/2012 Adam started a business. He deposited $10,000 into a
bank account he opened specifically for his business.
ASSETS
$10,000
CAPITAL
$10,000
LIABILITIES
$0
CASH IN BANK
+ $10,000
MONEY INVESTED
BY OWNER
+ $10,000

11. ACCOUNTING EQUATION
EXAMPLE
• If on the 5/1/2012 Adam bought a computer for $3,000 and he paid for this
by cheque.
ASSETS
$10,000
CAPITAL
$10,000
LIABILITIES
$0
COMPUTER = $3,000
BANK = ($10,000-$3,000)
=$7,000
TOTAL=$3,000+$7,000=
$10,000
UNCHANGED

12. BALANCE SHEET(STATEMENT OF
FINANCIAL POSITION)
• ASSETS
• COMPUTER $3,000
• CASH AT BANK ($10,000 - $3,000) $7,000
• TOTAL ASSETS $10,000
• CAPITAL $10,000

13. ACCOUNTING EQUATION
EXAMPLE
• If Adam purchased some stock for $500 from a supplier on credit
ASSETS
$10,500
CAPITAL
$10,000
LIABILITIES
$500
COMPUTER $3,000
BANK $7,000
STOCK $500
TOTAL $10,500
UNCHANGED
TRADE PAYABLES $500
ADAM OWES HIS
SUPPLIER $500

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