Which is the accounting equation?

assets = owner's equity + liabilities. What the business has equals what was provided by the owner and by others.

Which of these is a liability?

a bank overdraft. The business owes the bank that money.

Which of these is an asset?

trade receivables. Customers owe that money to the business.

A business buys a van for $9000, paying from its bank account. What happens to total assets?

They do not change. One asset (the van) goes up and another (bank) goes down by the same amount.

A business makes a profit of $6000 in a year, and the owner takes drawings of $4500. By how much does owner's equity change?

it rises by $1500. Profit adds 6000 and drawings take away 4500.

The accounting equation · Cambridge IGCSE Accounting

In plain words

Everything a business has was paid for by somebody: either the owner, or someone the business still owes. That simple idea is the accounting equation, and all of double entry grows out of it.

6 things to know

Assets are things owned by the business, or owed to it: premises, equipment, inventory, trade receivables, money in the bank.
Liabilities are amounts the business owes to others: trade payables, loans, a bank overdraft.
Owner's equity (capital) is what the business owes to its owner: the money the owner put in, plus profits, less drawings.
The accounting equation: assets = owner's equity + liabilities. Rearranged: owner's equity = assets − liabilities.
Every transaction changes two things, and the equation still balances afterwards.
Profit increases owner's equity. A loss and drawings reduce it.

Worked example

A business has assets of $54 000 and liabilities of $16 500. Find the owner's equity. It then buys equipment for $3000 on credit. Show that the equation still balances.

Owner's equity = assets − liabilities = 54 000 − 16 500 = $37 500.
Buying equipment adds an asset: assets become $57 000.
It was bought on credit, so a liability is added too: liabilities become $19 500.
57 000 = 37 500 + 19 500. It balances, and the owner's equity has not changed.

Tips and tricks

Think about each transaction as two changes. If only one side of the equation has moved, you have missed one.
Buying an asset on credit does not change owner's equity. Only profit, loss, new capital and drawings do.

6 questions, about 2 minutes.

It lands in your notebook with its questions as flashcards.

The accounting equation: 6 questions and answers

These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.

Which is the accounting equation?
- assets = liabilities − owner's equity
- assets = owner's equity + liabilities (the answer)
- owner's equity = assets + liabilities
- liabilities = assets + owner's equity
What the business has equals what was provided by the owner and by others.
Assets are $70 000 and liabilities are $25 000. What is the owner's equity?
- $25 000
- $45 000 (the answer)
- $70 000
- $95 000
70 000 − 25 000.
Which of these is a liability?
- inventory
- trade receivables
- a bank overdraft (the answer)
- equipment
The business owes the bank that money.
Which of these is an asset?
- trade payables
- a bank loan
- capital
- trade receivables (the answer)
Customers owe that money to the business.
A business buys a van for $9000, paying from its bank account. What happens to total assets?
- They rise by $9000.
- They fall by $9000.
- They do not change. (the answer)
- They rise by $18 000.
One asset (the van) goes up and another (bank) goes down by the same amount.
A business makes a profit of $6000 in a year, and the owner takes drawings of $4500. By how much does owner's equity change?Stretch
- it rises by $10 500
- it rises by $6000
- it rises by $1500 (the answer)
- it falls by $4500
Profit adds 6000 and drawings take away 4500.

6 questions

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Worksheet

3 questions, 6 marks. Write your answers on paper, then check them.

The accounting equation

Cambridge IGCSE Accounting 0452 · 6 marks · papermunch.org

Name ______________________________ Date ______________

A business has liabilities of $8400 and owner's equity of $31 600. Calculate its total assets.[2]
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$40 000. Assets = owner's equity + liabilities = 31 600 + 8400.
I got this one
State the effect on assets, liabilities and owner's equity when a business pays a supplier $500 from its bank account.[2]
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Assets decrease by $500 (bank). Liabilities decrease by $500 (trade payables). Owner's equity does not change.
I got this one
The owner takes $200 cash from the business for personal use. State the effect on the accounting equation.[2]
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Assets decrease by $200 (cash). Owner's equity decreases by $200 (drawings).
I got this one

Answers: The accounting equation

1. $40 000. Assets = owner's equity + liabilities = 31 600 + 8400.
2. Assets decrease by $500 (bank). Liabilities decrease by $500 (trade payables). Owner's equity does not change.
3. Assets decrease by $200 (cash). Owner's equity decreases by $200 (drawings).