The accounting equation illustrates that assets equal shareholders' equity plus liabilities, emphasizing how resources owned by a company depend on contributions from owners and lenders. Two examples demonstrate this relationship: a business increases its cash and liabilities by borrowing $3,000 and acquires a machine while exchanging $300 in cash for it, resulting in an equal adjustment in asset totals. Overall, the document provides fundamental insights into the accounting equation and its application in business transactions.

1. The Accounting Equation

2. Assets = Shareholders' Equity + Liabilities
The value of a company's asset(resources owned)
depends on how much owners (shareholders’
equity) and lenders (liabilities) have put into
the business
The Accounting Equation

3. Diagram of the Accounting Equation
The relationship between assets, shareholders' equity and
liabilities

4. Example 1
• Your business borrowed $3,000 from the bank
• Now the business has $3,000 extra cash. Cash is
an asset. Hence, the business has an extra
$3,000 worth of assets. Where did the asset
come from this time? The business borrowed
that from a lender. The liability of the business
increases by $3,000.
Transaction Assets = Shareholders’ Equity + Liabilities
(1) +3,000 (Cash) +3,000 (Bank
Loan)

5. Example 2
• Your business buys a machine for $300.
• The business gave up $300 cash, which is an
asset. It in return gains a machine, which is also
an asset. So the business’s asset decreases by
$300 and then increases by $300.
Transaction Assets = Shareholders’ Equity + Liabilities
(1) +3,000 (Cash) +3,000 (Bank
Loan)
(2) - 300 (Cash)
+ 300
(Machinery)

6. For more free accounting study notes, visit
http://notestoaccounts.com
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