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accounting equation
LEARNING OBJECTIVE 3 Understand the accounting equation process of the double- entry system of recording The accounting equation – process of double entry • The accounting equation is known as the relationship between assets (whether owned or controlled by the entity) liabilities and equity (A = L + E) • Liabilities and equity represent the claims against the entity’s assets. The accounting equation – process of double entry cont. • Business transactions are analysed by examining the dual effect of each business transaction and the impact on the accounting equation (Assets = Liabilities + Equity). The accounting equation – process of double entry cont. • The concept of duality simply means that every business transaction will affect the accounting equation – the result of which leaves the equation in balance! The accounting equation – process of double entry cont. • The Equity section of the accounting equation can be expanded to analyse the effects of income and expenses – determines net profit/loss for the period. • Net profit/loss is then added to the entity’s opening equity in the equity section of the Balance Sheet. LEARNING OBJECTIVE 4 Illustrate the impact of business transactions on the accounting equation. Business transactions on the accounting equation Transactions normally change both sides of the accounting equation but can also just affect one side – e.g. Entity buys car for cash – – Bank (asset) decreases and vehicle (asset) increases. . Understand the accounting equation process of the double- entry system of recording The accounting equation – process of double entry • The accounting equation. transactions on the accounting equation. Business transactions on the accounting equation Transactions normally change both sides of the accounting equation but