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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