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Accounting equation is based on the concept of double entry accounting.

Formula:

accounting-equation-formula-1
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Asset is the right to receive economic benefits in future.

Liability is the claim of creditors on assets of the entity.

Equity is the claim of owners on assets of the entity.

In statement of financial position, equity is stated after the liability, which means owners have residual claim on assets after satisfying the claims of creditors.

Equity is the excess of Total Asset over Total Liability.

accounting-equation-formula-2
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Illustration

A sole trader invests $1,000 in a fruit shop.

He/she buys 100 kg bananas;

Sells half of the stock during the day for $600.

Draws $50 from the business

Sells rest of the bananas on credit for $600.

Purchases $500 of bananas on credit.

Purchases

Required:

Determine the impact of above transactions on accounting equation.

accounting-equation
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