Inside DISCOVERBOOKKEEPING: The Accounting Equation
May 15, 2012 Leave a comment
After the Chart of Accounts chapter we move onto The Accounting Equation. Essentially, the Accounting Equation is a simple mathematical form that sums up the relationship among the accounting elements. It is also the foundation for the double-entry bookkeeping system:
Assets = Liabilities + Capital*
*in a corporation, Capital is known as Owner’s Equity (stockholders’ equity)
As defined, Assets are what a business owns, Liabilities are what a business owes, and Capital is the difference between assets and liabilities. It is important to note that the reason why liabilities are placed before capital is because of the legal priority given to the creditors’ claim to assets than owner’s claim to assets.
Each business transaction has at least two effects on the Accounting Equation known as the “dual effect”. Depending on what the business transaction entails, it can increase or decrease one to two elements of the Equation. The method used to record a business transaction is referred to as the “double-entry accounting,” where there are equal number of debit and credit entries.
For our participants to grasp the basic concept of the Accounting Equation, our DISCOVERBOOKKEEPING course book includes in-class assignments and homework problems. We first introduce the Equation from a mathematical aspect where both sides have to balance. Then we progress to reading business transactions and determining which elements of the Equation they each effect. It is also the chapter where the purposes of T-Accounts are explained, as well as, how to prepare a Trial Balance and financial statements: Income, Capital, and Balance Sheet.