Unit 2: FOUNDATIONS OF ACCOUNTING
Topic 2.3
The Accounting Equation
Overview
One of the most important foundations of accounting is the accounting equation because
it provides the accountant with the framework to follow in the conduct of accounting. This
module will present to us the accounting equation at work.
Learning Objectives
At the end of this module, you should be able to:
1. Illustrate the accounting equation
2. Discuss the three major accounts
3. Cite examples for each type of accounts
4. Prepare a chart of accounts; and
5. Perform operations involving simple cases with the use of the accounting equation.
Discussion
ACCOUNTING EQUATION DEFINED
The accounting equation is the basis of financial accounting because this gives the framework of
how the accountant will record financial transactions and eventually report the results to the
different users of accounting information. The accounting equation is presented below.
ASSETS = LIABILITIES + OWNER’S EQUITY
This accounting equation is the framework of the whole accounting process, thus this must be at
the heart of every accountant. It is the basis of all accounting systems, therefore an essential
building block of accounting. As this is an equation, both sides must always be balanced. It
will be very helpful in illustrating the double-entry bookkeeping system.
Accounting Equation as the Balance Sheet Equation
Another important function of this equation is that it is also the pattern of a Financial Statement
called the Balance Sheet or the statement of financial position of a business entity as at a given
time. That is why it is important to note that the accounting equation is also called as the
Balance Sheet equation. To illustrate this point, we have a sample Balance Sheet below.
Topic 2.3
The Accounting Equation
Overview
One of the most important foundations of accounting is the accounting equation because
it provides the accountant with the framework to follow in the conduct of accounting. This
module will present to us the accounting equation at work.
Learning Objectives
At the end of this module, you should be able to:
1. Illustrate the accounting equation
2. Discuss the three major accounts
3. Cite examples for each type of accounts
4. Prepare a chart of accounts; and
5. Perform operations involving simple cases with the use of the accounting equation.
Discussion
ACCOUNTING EQUATION DEFINED
The accounting equation is the basis of financial accounting because this gives the framework of
how the accountant will record financial transactions and eventually report the results to the
different users of accounting information. The accounting equation is presented below.
ASSETS = LIABILITIES + OWNER’S EQUITY
This accounting equation is the framework of the whole accounting process, thus this must be at
the heart of every accountant. It is the basis of all accounting systems, therefore an essential
building block of accounting. As this is an equation, both sides must always be balanced. It
will be very helpful in illustrating the double-entry bookkeeping system.
Accounting Equation as the Balance Sheet Equation
Another important function of this equation is that it is also the pattern of a Financial Statement
called the Balance Sheet or the statement of financial position of a business entity as at a given
time. That is why it is important to note that the accounting equation is also called as the
Balance Sheet equation. To illustrate this point, we have a sample Balance Sheet below.
