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Accounting Equation

If you put in a large sum of money to start a business, the money becomes the capital of the business. The cash money is also the asset of the business, so we can now safely say:

Asset = capital (owner’s equity)

If you bring in a sum of money and a machine to start a business, the cash and the machine make up the capital. Capital does not need to be just cash. The equation is the same except this time there two kinds of assets:

Assets (cash + machine) = capital

Now you may have borrowed some money from a friend and a bank to add to your capital to start the business. Money borrowed is a liability, so now the equation becomes:

Assets = capital + liabilities (loans)

This illustrates the equality of both sides of the equation no matter what transactions take place because each transaction requires the debit total to be equal to the credit total. This double-entry recording ensures the two sides of the equation will always have the same totals.

If you put in a large sum of money to start a business, the money becomes the capital of the business. The cash money is also the asset of the business, so we can now safely say:

Asset = capital (owner’s equity)

If you bring in a sum of money and a machine to start a business, the cash and the machine make up the capital. Capital does not need to be just cash. The equation is the same except this time there two kinds of assets:

Assets (cash + machine) = capital

Now you may have borrowed some money from a friend and a bank to add to your capital to start the business. Money borrowed is a liability, so now the equation becomes:

Assets = capital + liabilities (loans)

This illustrates the equality of both sides of the equation no matter what transactions take place because each transaction requires the debit total to be equal to the credit total. This double-entry recording ensures the two sides of the equation will always have the same totals.

Last Updated (Monday, 01 November 2010 13:44)