IGCSE Accounting Equation
In this lesson, we will learn what does accounting groups – assets, liabilities, equity, incomes and expenses comprises. You will see how they work together to form the Accounting Equation. By understanding their linkage, you’ll be able to see how business transactions affect a company’s financial position.
Related Lessons:
Identifying Accounting Groups
Here’s a recap of what we learnt in the lesson:
Assets
Are resources that a business owns and use to carry out its operation.
Examples of accounts: Trade receivables, inventory, cash in hand, cash at bank, machinery, equipment, fixtures & fittings, motor vehicles, premises, buildings
Liability
Are obligations that a business owes to others.
Examples of accounts: Trade payables, loans
Capital
Are assets contributed by the business owner into the business.
Examples of accounts: Capital
Drawings
Are business assets withdrawn by business owner for personal use.
Examples of accounts: Drawing
Income
Are revenue earned by the business.
Examples of accounts: Sales revenue, discount received, interest income, commission income etc
Expense
Are goods or services used by the business to earn income.
Examples of accounts: Cost of sales, sales returns, discount allowed, utilities, rent, salaries etc
Applying Accounting Equation
Here’s a recap of the lesson:
Each account group is linked by the Accounting Equation:
Assets = Liability + Owner’s Equity
where Owner’s equity = Capital + Profit for the year (or minus Loss for the year) – Drawings
Profit or Loss for the year = Income – Expenses
As such, the accounting equation can also be written as:
Assets = Liability + [Capital + (Income – Expenses) – Drawings]