An introduction to the Accounting Equation and its components.

1. The Accounting Equation
An Introduction
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2. All businesses have three parts to their
financial makeup:
• The things or property that the company owns.
We call these things ASSETS.
• The money that the company owes to other
people.
We call these obligations LIABILTIES.
• The claim of the owner of the business to the
Assets after the Liabilities are paid.
We call this claim OWNER’S EQUITY (or just
EQUITY).
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3. These three parts ALWAYS have the
same relationship to each other. We
call this relationship the
Accounting Equation
Assets = Liabilities + Equity
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4. The Accounting Equation could also apply to a
personal situation. Suppose you buy a car for
$5,000, borrow $4,000 from the bank, and pay the
rest yourself. Here’s the result:
Accounting Equation
Assets = Liabilities + Equity
$5,000 = $4,000 + $1,000
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5. ASSETS are the
RESOURCES OWNED BY A BUSINESS .
Here are some types of assets that might
be owned by a business company:
Cash Notes
Accounts
Receivable
Receivable
Vehicles ASSETS Land
Store Buildings
Supplies
Equipment
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6. LIABILITIES are the
CREDITOR’S CLAIMS ON ASSETS.
• Creditors are the people or companies to whom a business
owes something (like money).
• Here are some types of liabilities that a company might owe:
Accounts Notes
Payable Payable
LIABILITIES
Taxes Wages
Payable Payable
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7. EQUITY is the OWNER’S CLAIM ON ASSETS
In a business EQUITY is composed of four
parts that either increase or decrease equity:
EQUITY
CAPITAL: WITHDRAWALS: REVENUES: EXPENSES:
What the
owner puts − What the owner
takes out of the
+ What the
company − What the
company
into the business receives for pays to
business sales operate the
business.
INCREASE DECREASE INCREASE DECREASE
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8. Sometimes we expand the Accounting
Equation to show all the Equity
components. This is called the
EXPANDED ACCOUNTING EQUATION.
This equation must
ALWAYS BE IN
BALANCE
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