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- Accounting Equation Definition
- Elements of Accounting Equation Explanation
- Elements Which Affect the Capital
The accounting equation is the cornerstone of accounting. The fundamental of the double-entry accounting system stands on it.
Note that if you want to understand the double-entry system or modern accounting, then you should understand the accounting equation well and clearly. Because the concept of the accounting equation is understandable to you then journal entry, ledger entry, trial balance, worksheet, balance sheet ... all will be clear to you. In other words, these mathematical functions will be easy to understand for you.
Accounting Equation:
The equation by which total assets and total liabilities are shown
equally is called the accounting equation. By accounting equation, we
can know the amount of asset, liability, and owner equity.
Below we has shown the accounting equation.
A=L
or, if we elaborate the equation...then we find...
A=L+E
Here,
A= Asset
L= Liability
E= Equity or owner equity or capital
So, the accounting equation is stand in full form as...
Asset = Liability + Equity
We will further discuss on the accounting equation elements in order to make it clear to understand.
By the way, Accounting equation is the equation which has been developed by the applying double entry system formula. That means which equation has been presented by depending on the double entry system is called accounting equation.
Elements of Accounting Equation:
Elements of accounting equation are asset, liability and equity or owner equity or shareholder equity. We've discussed those below...
Asset:
Assets are a business's rights from which financial
benefits will be available in the future. For example; account
receivable, treasury bills, certificate of deposit, building, land,
furniture, and equipment, etc.
Liability:
Which parties will
get money from a business are liabilities. So liability is the amount of
money that a business needs to pay. For example; product purchase in
credit, account payable, short term loan, long term loan, mid-term loan,
etc.
Capital/Shareholder Equity:
Capital is the investment of
the business owner. It is also one kind of liability for a business.
Because, in the double-entry system, the business is operated like an
artificial entity.
If the business owner takes money from the business organization, then it will be listed in the book of withdrawal. In such kind of transaction, owner equity or capital makes debit to show the reduction of ownership interest in the business.
For
shareholder equity, the term is the same. just think about the matter
instead of a single or partnership owner of a business.
Elements Which Affect the Capital:
There are some elements that affect the capital of a business. We will discuss those below.
1. Income:
Income
is the exchange value of a product or service. For income, the
capital is affected. If income is increased, capital is increased. On
the contrary, If income is decreased, then the capital is decreased.
2. Expense:
To
purchase products or taking service the money is spent is called
expense. In other words, the cost of purchasing an asset or taking a
service in order to earn an income is called expense.
By expense, the capital is affected. If the expense is increased, the capital is decreased. On the contrary, if the expense is decreased, the capital is increased.
3. Withdrawal:
If the business owner takes money,
product, service, or asset from the business, then it will be
withdrawal.
By withdrawal, the capital is affected. If the withdrawal is
increased, the capital is decreased. On the contrary, if the withdrawal
is decreased, the capital is increased.
