basic accounting equation

Now that you the parts of the accounting equation, let’s talk about how it works. This will cancel the values, and no change has happened on the right side of the equation. On January 1st, 2020, Sherry took out the money from her savings for $100,000 to start her skincare business. Determine the asset, liability, and equity value of her skin clinic as of January 1st, 2020. Paul took $1000 from his savings to contribute to the starting business. He also took a soft loan of $4000 from a credit union to buy office supplies. He received a $400 insurance bill for his shop two days later.

Which one of the following can the accounting equation can be rewritten as Mcq?

The accounting equation can be written as: Assets + Profits – Drawings – Liabilities = Closing Capital. Assets – Liabilities – Drawings = Opening Capital + Profit.

At the heart of this is the balance sheet, which shows a balance of total assets, total liabilities, and shareholder equity. By studying the dual impact of transactions on the accounting equation, one can better understand a company’s financial operations. Each transaction can change the balance of assets, liabilities, and equity. It’s like a game of economic chess, with each move meticulously calculated to keep the balance. The ledger of the business is prepared with the help of an accounting equation which further provides the material to prepare various financial statements of the company.


Small business owners can gain a clear snapshot of their financial situation and make informed business decisions by understanding this equation. The equation ensures that a company’s financial records are up-to-date and accurate and provides a simple and quick way to assess its financial health. In double-entry accounting or bookkeeping, total debits on the left side must equal total credits on the right side. That’s the case for each business transaction and journal entry. This article gives a definition of accounting equation and explains double-entry bookkeeping. We show formulas for how to calculate it as a basic accounting equation and an expanded accounting equation. The accounting equation is also highly valuable for the investors.

company’s assets

In its simplest form, the accounting equation shows us how much a firm owns , owes , and hence, how much it’s worth . As the fintech industry continues to expand, memorizing accounting equations will become obsolete.

Expanded Accounting Equation – Explained

On January 1, 2020, the had $100,000 assets in terms of cash, $0 liabilities, and $100,000 owner’s equity. The accounting equation plays a significant role as the foundation of the double-entry bookkeeping system. It is based on the idea that each transaction has an equal effect. It is used to transfer totals from books of prime entry into the nominal ledger. Every transaction is recorded twice so that the debit is balanced by a credit. To understand the purpose of the accounting equation, it’s first helpful to take a closer look at double-entry accounting.

The borrows money or purchases goods from a lender or supplier and promises to pay after an agreed period with interest. Examples of liabilities are accounts payable, short-term debt borrowings, and long-term debts. Costs are obligations that a business needs to pay, including rent, taxes, utilities, salaries, wages, and dividends payable. The expanded accounting equation goes hand in hand with the balance sheet; hence, it is why the fundamental accounting equation is also called the balance sheet equation. Any changes to the expanded accounting equation will result in the same change within the balance sheet. Shareholder’s equity is the company owners’ residual claims on assets after deducting all liabilities deducted. The expanded accounting equation will further break them down.