The accounting equation is the fundamental framework of the entire financial accounting process. The whole of accounting is based on this equation.
The equation can be expressed as:
Assets = Capital + Liabilities.
Assets: Can be defined as the properties or resources of a business. Example Land and Building, Premises, Motor Van, Cash in hand, etc.
Liabilities: These are obligations to pay out money sometime in the future. It is the indebtedness of the firm to outsiders. Examples Loan, Creditors, Overdraft and Debentures, etc.
Capital: This is the total money provided by the owner to start a business. It is equally referred to as the: “NET Worth or Owners Equity”.
Summary of Accounting Equation:
Assets = Liabilities + Capital
Capital = Assets – Liabilities
Liabilities = Assets – Capital
Worked Example on Accounting Equation
You are required to complete the gaps in the following Table:
(a) Assets = Liabilities + Capital
300,000 = L + 190,000
L = 300,000 – 190,000
L = 110,000
(b) Assets = Liabilities + Capital
A = 18,000 + 14,000
A = 32,000
(c) Assets = Liabilities + Capital
5,000,000 = 2,000,000 + C
C = 3,000,000.