Accounting Equation Overview, Formula, and Examples

Metro issued a check to Rent Commerce, Inc. for $1,800 to pay for office rent in advance for the months of February and March. Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI’s full course catalog and accredited Certification Programs.

This is the value of money that the business owners can get after all liabilities are paid off if the business shuts down. This may be in the form of shared capital or outstanding shares of stocks. Retained earnings are the sums of money that came from the company’s profit that was not given back to the shareholders.

Double entry bookkeeping system

With the information that is given in the example, we see that Ed has a store that is valued at $40,000 and equipment that is valued at $10,000. Looking back, we see that Ed owes the bank $25,000 and his employee $15,000. Have you ever been to the circus and watched the high wire act? It amazes me how those men and women manage to walk across that thin wire stretched way above the ground. What also amazes me is that the thing they use to keep their balance is just a long pole.

The accounting equation is based on the premise that the sum of a company’s assets is equal to its total liabilities and shareholders’ equity. As a core concept in modern accounting, this provides the basis for keeping a company’s books balanced across a given accounting cycle. Double-entry accounting is a system that ensures that accounting and transaction equation should be equal as it affects both sides.

Accounting equation:More examples and explanation

Metro Corporation earned a total of $10,000 in service revenue from clients who will pay in 30 days. Metro issued a check to the accounting equation may be expressed as Office Lux for $300 previously purchased supplies on account. Metro purchased supplies on account from Office Lux for $500.

• 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.
• Refer to the chart of accounts illustrated in the previous section.
• Every transaction is recorded twice so that the debit is balanced by a credit.
• The inventory (asset) will decrease by $250 and a cost of sale (expense) will be recorded.

As this is not really an expense of the business, Anushka is effectively being paid amounts owed to her as the owner of the business (drawings). The business has paid $250 cash (asset) to repay some of the loan (liability) resulting in both the cash and loan liability reducing by $250. $10,000 of cash (asset) will be received from the bank but the business must also record an equal amount representing the fact that the loan (liability) will eventually need to be repaid.