The Accounting Equation

Topics: Balance sheet, Generally Accepted Accounting Principles, Accounting equation Pages: 2 (438 words) Published: April 13, 2011
THE ACCOUNTING EQUATION
The accounting equation can be described as of the basis of accounting. This is because it describes the double entry principle of book-keeping. It is a representation of how funds are raised to finance Assets. The equation is illustrated below:

Asset = Capital + Liabilities
For example, a girl needs to buy a laptop costing £500. She already had £250 in personal savings and then took a loan of £250 from her boyfriend. Here is the equation again:
AssetCapitalLiabilities

£500 (Laptop) = £250 (personal savings) + £250 (borrowings)

DOUBL E ENTRY BOOKKEEPING
Double entry bookkeeping describes the way transactions are recorded in accounting ledgers. The system works by recording a transaction twice to maintain checks and balances. For every debit entry, there is a corresponding credit entry. That is, for every transaction recorded on the left side (Debit), there will be a corresponding entry on the right side (credit). Using the above example, the double entry will be like this: DRCR

££
Laptop500
Capital250
Liability250
Total500500

To illustrate this using individual transactions

CAPITAL A/C
DRCR
Capital250

LOAN A/C
DRCR
Loan250

ASSET A/C
DRCR
Laptop500

FIXED ASSETS
Fixed assets are those assets of a company that have a useful life of more than one year. Examples include land, building, motor vehicle and machinery.

CURRENT ASSETS
Current assets are those assets of a company that have a short useful life of less than one year. Examples include cash, inventory, debtors and cash at bank.

CURRENT LIABILITIES
Current liabilities are the liabilities of a company falling due within one year. Examples include trade creditors and bank overdraft.

TRADING AND PROFIT AND LOSS ACCOUNT
The trading and profit and loss account is a statement showing the trading activities of a business, the expenses incurred in the trading and the profit...
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