The Accounting Equation

Lesson 3: THE ACCOUNTING EQUATION
Assets = Liabilities + Owner’s Equity
A. The T - Accounts

Proforma:
Title of Account


Debit Side Credit Side
(value received) (value parted with)


Assets = Liabilities + Owner’s Equity
Increase Decrease Decrease Increase Decrease Increase




B. Sample Transactions

Transactions Value Received Value Parted With
1. Bought a computer in cash Computer/Equipment Cash
2. Bought furniture on credit Furniture Obligation to pay
3. Received cash for rendered service Cash Service
4. Payment of debt Cancellation of debt Cash
5. Payment of rent Rental Cash
6. Sale of merchandise on credit Collectibles Merchandise
7. Receipt of payment from customer Cash Release of debt
collectible
C. Expanded Accounting Equation
Transactions Assets = Liabilities + Owner’s Equity
1. Computer (10,000)
Cash 10,000
2. Furniture 5,000 Debt 5,000
3. Cash 2,000 Service 2,000
4. Cash (5,000) Debt (5,000)


D. Summary of Effects
a. Increase in Assets = Increase in Equity
b. Increase in Assets = Increase of Liabilities
c. Increase in other forms of Assets = Decrease in other forms of Assets
d. Decrease in Assets = Decrease in Equity
e. Decrease in Assets = Decrease of Liabilities