ACCOUNTING EQUATION

ACCOUNTING EQUATION

v  Introduction

v  Definition of Accounting Equation

v  Meaning of Asset, Liability and Capital

v  Worked Example

Ø Introduction

A lot of student finds this aspect of accounting difficult; this is one of the basic formulas that would be needed for most accounting solving.

Ø Definition of Accounting Equation.

Accounting equation is used to determine a business performance over a specific period of accounting period usually a year. It is expressed mathematically as;

Asset = Liability + Capital (Owner’s equity).

I.e. The Total Liability with the addition of Capital Must be equal to our Total Asset.

Ø Meaning of Asset, Liability and Capital.

Asset is what a business owns, known as the business property. Before a business can function well there are necessary thing that must be put in place for the functioning of such business those material bought & sold are known as the business property. There are two type of asset namely;

1.       Non- current Asset: These are asset that are fixed in nature they have long life span, they are the major instrument used for the company productivity i.e. It is not bought for resale but for the production of other commodity e.g. Land & Building, Machinery, Plant and Machinery, Equipment etc.

2.       Current Asset: These are asset that are temporary in nature, they are easily converted into cash, and their duration is within a year. E.g. Inventory, Debtor, Cash etc.

Liability is what the business owes to others. At times the business may need loan to finance it business such loan is referred to as Liability. We have Non-current and Current liability. Examples; Debentures, Overdrafts, Creditors etc.

Capital this is the amount invested in a business. For any business to survive it needs a specific amount in financing such business, this is the money that must be in place in commencement of the business.

Ø Worked Examples;

Asset	Liability	Capital
8000	3000	5000
10000	?	6000
35000	15000	?
?	17000	3000
?	2000	300

 Remember our accounting Equation

                Asset = Liability + Capital

                8000 =3000 + 5000

Similarly to get our Liability Simple mathematics procedure will be followed.

I.e.         Liability = Asset – Capital

Note: The Capital takes a negative sign because the liability cross the equality sign which permanently changes the sign.

i.e.          10000 = L + 6000

Which will now give us; L = 10000 – 6000

Our Liability = 4000

Same thing is applicable to Capital

i.e.          Capital = Asset – Liability

                ?              =35000-15000

Therefore our Capital=20000

Asset	Liability	Capital
8000	3000	5000
10000	4000	6000
35000	15000	20000
20000	17000	3000
2300	2000	300

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