Accounting Equation

ACCOUNTING EQUATIONS


There are 3 Components of accounting equation:

• Asstes
• Liabilities
• Owner’s Equity


ASSETS

- Assets are items of value owned by the business

- e.g. buildings, machinery, motor vehicles, stock of goods, debtors, cash at bank and
cash in hand.


LIABILITIES

- Liabilities are debts owned by the business to external parties

- A business incurs liabilities when it purchases items on credit from its suppliers
(creditors)

- A business also incurs liabilities when services are provided to the business have not yet
been paid by the business (Accrued Expenses).

- Liabilities are also incurred when the business borrow money from the banks by taking
bank loan and bank overdraft.

- E.g. Loan, Bank overdraft, Accrued Expenses, Creditors, Owings.



OWNER’S EQUITY

- The funds of a business provided by its owner(s)

- An owner of a business can calculate his net worth of his business by deducting the
liabilities from the assets of the business

- Owner’s equity = Assets - Liabilities

- Owner’s Equity can INCREASE when assets are introduced into the business through the investment by the owner(s)

- Owner’s equity can DECREASE when the owner(s) withdraws its assets for personal
use.

- Business operations can also affect owner’s equity. Profits from business operation can
increase owner’s equity while Losses will reduce it.



Accounting Equation is defined as:

ASSETS = LIABILITIES + OWNER’S EQUITY
A = L + OE

A – OE = L

A – L = OE