The Accounting Equation (Copy)
Cheat Sheet: 1.2 The Accounting Equation
O Level and IGCSE Accounting Quick Revision
Key Definitions
| Term | Definition |
|---|---|
| Assets | Resources owned by the business with future economic benefit. |
| Liabilities | Amounts the business owes to outsiders (e.g. loans, creditors). |
| Owner’s Equity | The owner’s share in the business; the residual interest in assets after deducting liabilities. |
Types of Assets
| Asset Type | Examples |
|---|---|
| Non-current | Machinery, equipment, vehicles |
| Current | Cash, inventory, trade receivables |
Types of Liabilities
| Liability Type | Examples |
|---|---|
| Non-current | Bank loan repayable after 1 year |
| Current | Trade payables, bank overdraft |
The Accounting Equation
Assets=Liabilities+Owner’s Equitytext{Assets} = text{Liabilities} + text{Owner’s Equity}
Or rearranged:
Owner’s Equity=Assets−Liabilitiestext{Owner’s Equity} = text{Assets} – text{Liabilities}
Example 1: Basic
- Assets = $30,000
- Liabilities = $12,000
- Owner’s Equity = $30,000 − $12,000 = $18,000
Example 2: After Transaction
Initial Position:
- Assets = $10,000 (Cash)
- Liabilities = $0
- Owner’s Equity = $10,000
Transaction: Buy inventory worth $2,000
- New Assets = $8,000 Cash + $2,000 Inventory = $10,000
- Liabilities = $0
- Owner’s Equity = $10,000 (unchanged)
Conclusion: Total assets stay the same, form changes
Effects of Transactions on the Equation
| Transaction | Effect on Equation |
|---|---|
| Owner invests capital | Increase in assets and equity |
| Business takes a loan | Increase in assets and liabilities |
| Business earns revenue | Increase in assets and equity |
| Business incurs expenses | Decrease in assets and equity |
| Repays part of a loan | Decrease in assets and liabilities |
Practice Table
| Transaction | Asset Change | Liability Change | Owner’s Equity Change |
|---|---|---|---|
| Owner starts business with $5,000 | +5,000 | 0 | +5,000 |
| Takes loan of $3,000 | +3,000 | +3,000 | 0 |
| Buys equipment for $2,000 cash | 0 | 0 | 0 (asset form change) |
| Earns $1,000 from sales | +1,000 | 0 | +1,000 |
| Pays rent $500 | −500 | 0 | −500 |
Quick Recap
- Owner’s Equity = Assets − Liabilities
- Every transaction must keep the equation balanced
- Owner’s equity increases with capital and profits
- Owner’s equity decreases with drawings and losses