Accountancy · Ch 2 — Conceptual Framework of Accounting
The Accounting Equation
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The Accounting Equation
The Dual Aspect Concept expressed mathematically is the Accounting Equation:
Assets = Liabilities + Capital (often written as A = L + C)
Every single transaction a business enters into — however varied — affects this equation in one of only a few possible ways, and after each transaction the equation must still balance:
| Transaction type | Effect on equation |
|---|---|
| Owner brings in capital (cash) | Asset (Cash) increases; Capital increases |
| Goods purchased for cash | One asset (Cash) decreases; another asset (Stock) increases — total assets unchanged |
| Goods purchased on credit | Asset (Stock) increases; Liability (Creditors) increases |
| Expense paid in cash | Asset (Cash) decreases; Capital decreases (expense reduces profit, which reduces capital) |
| Revenue received in cash | Asset (Cash) increases; Capital increases (revenue increases profit, which increases capital) |
| Asset purchased on credit | Asset increases; Liability increases |
| Drawings by owner | Asset (Cash/Goods) decreases; Capital decreases |