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Accounting equation

Assets = Owner’s Equity + Liabilities

The above accounting equation expresses the fact that everything the business owns has been supplied by the owner (owner’s equity) and by external source (liabilities).

Elements of Accounting Equation

Assets

Assets are items of value owned by the business. Examples include

  • Building
  • Machinery
  • Motor vehicle
  • Cash at bank
  • Cash in hand
  • Stock
  • Debtors (people who own money to the business)

Liabilities

These denote the amounts which the business owes to others. Examples include

  • Creditors (people to whom the business owes money)
  • Bills payable
  • Bank overdraft
  • Bank loan

Owner’s equity

The funds of a business provided for by its owners.
Owner’s equity = Assets – Liabilities

 

Owner’s equity increases by Owner’s equity decreases by
Profits Losses
Additional investment into the business Drawings

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