business transactions

Next, Sally $4,000 worth of inventory to stock her store. The inventory purchase affected the inventory account under assets and the accounts payable account under liabilities. The accounting equation doesn’t consider the type of assets and liabilities on your balance sheet.

  • Likewise, as the company receives payment from its customers, accounts receivable is credited and cash is debited.
  • On the left-hand-side of the equation are the resources of the business.
  • Furthermore, the accounting equation helps to ensure that a company’s financial statements are accurate.
  • There may be one of three underlying causes of this problem, which are noted below.
  • This is merely a rounding issue – there is not actually a flaw in the underlying accounting equation.

Recording of a debit amount to one account and an equal credit amount to another account results in total debits being equal to total credits for all accounts in the general ledger. If the accounting entries are recorded without error, the aggregate balance of all accounts having positive balances will be equal to the aggregate balance of all accounts having negative balances. Equity is any amount of money remaining after liabilities are subtracted from assets. Examples of equity recognized in a company’s financial statements include retained earnings and ordinary share capital. Due to the nature of the accounting formula, other elements can be moved around as needed to solve for unknown variables. For instance, if you did not know the equity of the company but did know its liabilities and assets, you could subtract liabilities from assets in order to determine the equity.

Overview: What is the accounting equation?

Thus, the asset and equity sides of the transaction are equal. Recording accounting transactions with the accounting equation means that you use debits and credits to record every transaction, which is known as double-entry bookkeeping.


The following also show the double entry practice that maintains the balance of the equation. Assets will always equal the sum of liabilities and owner’s equity.

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In a corporation, capital represents the stockholders’ equity. Thus, the accounting formula essentially shows that what the firm owns has been purchased with equity and/or liabilities. Does the stockholders’ equity total mean the business is worth $720,000? For example, although the land cost $125,000, Edelweiss Corporation’s balance sheet does not report its current worth.

Rebekiah received her BBA from Georgia Southwestern State and her MSM from Troy University. She has experience teaching math to middle school students as well as teaching accounting at the college level. She has a combined total of twelve years of experience working in the accounting and finance fields. Accounting equation explanation with examples,

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