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:
Asset Capital Liabilities
£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:
DR CR £ £
Total 500 500
To illustrate this using individual transactions
LOAN A/C DR CR
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 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 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