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Assets = Owner’s Equity + Liabilities

Items of The funds of a Debts owed

value business provided by a
owned/ by its owners and business to
controlled the profits external
by the entitled to him parties such
business as suppliers
 How Business Activities Change the
Accounting Equation
• Assets = Liabilities + Owner’s Equity
• Equation must always remain equal
• Transactions don’t always affect both sides of
the equation
• When analyzing transactions, always
– Read the transaction
– Identify the accounts
– Classify the accounts (Asset, Liability or Owner’s
Equity

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Assets = Owner’s Equity + Liabilities

Building
Capital Creditors
Motor vehicle
Profits Loan from bank
Office Equipment
Other creditors
Fixtures
Stock (closing)
Cash in hand
Cash at bank
Assets = Owner’s Equity + Liabilities
Every transaction will affect atleast 2
items.
The equation will still balance!
 A = OE + L
TRANSACTION THAT AFFECTS BOTH
ASSET AND LIABILITY

ASSET  LIABILITY 

ASSET  LIABILITY 

TRANSACTION THAT AFFECTS BOTH

ASSET AND OWNER’S EQUITY

ASSET  OWNER’S EQUITY 

ASSET  OWNER’S EQUITY 

 A = OE + L

TRANSACTION THAT AFFECTS

ASSETS ONLY

ASSET  ASSET 

TRANSACTION THAT AFFECTS

LIABILITIES ONLY
LIABILITY  LIABILITY 
 Examples : A = OE + L
a) John began business with cash in hand
$5000.
Cash $5000 Capital $5000
b) The firm took a bank loan of $8000.

Cash $8000 Bank Loan $8000

c) Being purchase of motor vehicle from
ABC Trading for $2000.
Motor Vehicle $2000 Cash $2000
 Examples : A = OE + L

d) Being payment of $500 to Creditor, Peter.

Cash  $500 Creditors  $500

e) Being receipt of $3500 in cheque from a debtor.

Debtors  $3500 Cash at Bank $3500

 Examples : A = OE + L

f) Being repayment of bank loan for $1500.

Cash  $1500 Bank Loan  $1500

g) Being purchase of office equipment from

Lee Trading on credit for $780.

Office Equipment $780 Creditors$780

(Lee Trading)
 Different versions of the accounting equation
The accounting equation can be expressed in a number
of different ways:
Asset emphasis:
•Assets = Liabilities + Equity
Liability emphasis:
•Liabilities = Assets – Equity
Equity emphasis:
•Equity = Assets - Liabilities

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 Transaction 1
• Transaction 1: Investment by owner. Ace Lawyer opens the Waikato Legal
Services firm in Hamilton by investing $20,000 cash into the business.
• The transaction results in an increase in the Cash Asset and an increase in
Equity.
• We note that the equation remains in balance,
– i.e. A = L + OE

Assets = Liabilities + Owner’s Equity

Cash Capital

+$20,000 +$20,000

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 Transaction 2
• Transaction 2: Purchase of equipment on credit. Ace purchases equipment
on credit from Computer Equipment Ltd for $9,000 (credit terms: 180 days).
• The transaction results in an increase in the Computer Equipment Asset and
an increase in Liability.
• We note that the equation remains in balance,
– i.e. A = L + OE

Assets = Liabilities + Owner’s

Equity
Cash + Equipment Accounts Capital
Payable
Old bal. $20,000 $20,000
Trans 2: + $9,000 +$9,000
New bal. $20,000 + $9,000 = $9,000 + $20,000
Total: $29,000 = $29,000
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 Transaction 3
• Transaction 3: Purchase of $1,500 of stationery supplies for use in the business.
$1,500 cash was used to pay for this purchase.
• The transaction results in an increase in Supplies on Hand Asset and a decrease
in the Cash Asset.

Assets = Liabilities + Owner’s

Equity
Cash + Supplies + Equipment Accounts Capital
on Hand Payable
Old bal. $20,000 + $9,000 = $9,000 + $20,000
Trans 3: - $1,500 + $1,500
New bal. $18,500 + $1,500 + $9,000 = $9,000 + $20,000
Total: $29,000 = $29,000

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 Transaction 4
• Transaction 4: $1,000 in legal services were provided for cash.
• We can straight away see that the transaction results in an increase in the Cash Asset
by $1,000 and an increase in the Legal Services Revenue account by $1,000.
• We note that the equation does not have Revenue heading,
– i.e. the equation is given as: A = L + OE
• As we explained earlier, the effect of a revenue increasing will need to be shown as
an increase in Equity.

Assets = Liabilities + Owner’s

Equity
Cash + Supplies + Equipment Accounts Capital
on Hand Payable
Old bal. $18,500 + $1,500 + $9,000 = $9,000 + $20,000

Trans 4: +$1,000 +$1,000

New bal. $19,500 + $1,500 + $9,000 = $9,000 + $21,000

Total: $30,000 = $30,000

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 Transaction 5
• Transaction 5: Legal services of $2,500 were provided on credit to a client,
Keith Queen.

• The transaction results in an increase in an Account Receivable Asset by

$2,500. Keith Queen owes $2,500 to Waikato Legal Services. He is an Account
Receivable and therefore recorded as an asset to the business. Although no
cash has been received from providing legal services, $2,500 of Legal
Services Revenue have been earned (Accrual concept) and will increase
Equity.

Assets = Liabilities + Owner’s

Equity
Cash + Accounts Receivable + Supplies +Equipment Accounts Capital
on Hand Payable
Old bal. $19,500 + $1,500 + $9,000 = $9,000 + $21,000
Trans 5: + $2,500 +$2,500
New bal. $19,500 + $2,500 + $1,500 + $9,000 = $9,000 + $23,500
Total: $32,500 = $32,500
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 Transaction 6
• Transaction 6: Paid Accounts Payable. Ace makes a $3,000 partial
debt repayment to Computer Equipment Ltd.

• The transaction results in a decrease to Cash Asset and a

decrease to Accounts Payable Liability.

Assets = Liabilities + Owner’s

Equity
Cash + Accounts Receivable + Supplies +Equipment Accounts Capital
on Hand Payable
Old bal. $19,500 + $2,500 + $1,500 + $9,000 = $9,000 + $23,500
Trans 6: -$3,000 - $3,000
New bal. $16,500 + $2,500 + $1,500 + $9,000 = $6,000 + $23,500
Total: $29,500 = $29,500
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 Transaction 7
• Transaction 7: Received from Accounts Receivable. Keith
Queen pays $500 on account owing to Waikato Legal Services

• The transaction results in an increase to Cash Asset and a

decrease to the Accounts Receivable Asset.

Assets = Liabilities + Owner’s

Equity

Cash + Accounts Receivable + Supplies +Equipment Accounts Capital

on Hand Payable
Old bal. $16,500 + $2,500 + $1,500 + $9,000 = $6,000 + $23,500
Trans 7: + $500 - $500
New bal. $17,000 + $2,000 + $1,500 + $9,000 = $6,000 + $23,500
Total: $29,500 = $29,500
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 Transaction 8
• Transaction 8: Payment of Expense. Ace pays $400 salaries to
legal assistant.

• The transaction results in a decrease to Cash Asset and a

decrease to Equity because of salaries expense.

Assets = Liabilities + Owner’s

Equity

Cash + Accounts Receivable + Supplies + Equipment Accounts Capital

on Hand Payable
Old bal. $15,000 + $2,000 + $1,500 + $9,000 = $6,000 + $21,500
Trans 9: - $400 - $400
New bal. $14,600 + $2,000 + $1,500 + $9,000 = $6,000 + $21,100
Total: $27,100 = $27,100
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 Transaction 10
• Transaction 10: It was determined that $500 of stationery supplies on hand has
been used up.

• The transaction results in a decrease to the Supplies on Hand Asset and a

decrease to Equity as a result of supplies becoming used up.
• We note that the equation has remained in balance,
– i.e. A = L + OE

Assets = Liabilitie + Owner’s

s Equity

Cash + Accounts Receivable + Supplies +Equipment Accounts Capital

on Hand Payable
Old bal. $14,600 + $2,000 + $1,500 + $9,000 = $6,000 + $21,100
Trans 10: - $500 - $500
New bal. $14,600 + $2,000 + $1,000 + $9,000 = $6,000 + $20,600
Total: $26,600 = $26,600
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