Question

accounting equation format with example​

Answer 1

Answer:

The accounting equation is used in double-entry accounting. It shows the relationship between your business’s assets, liabilities, and equity. By using the accounting equation, you can see if your assets are financed by debt or business funds. The accounting equation is also called the balance sheet equation.

The following examples are connected to the same business. Take a look at how different transactions affect the accounting equation. Then, see the business’s balance sheet at the end of this section.

Example 1:

You’re starting a business selling printed T-shirts. You save for a year before opening and contribute $10,000 to the new company. By doing this, you increase your business’s assets and owner’s equity by the same amount:

$10,000 Assets = Liabilities + $10,000 Equity

Example 2:

Let’s say that after you form your company, you need to buy equipment to print the T-shirts. You purchase $2,000 of the equipment on credit. In this situation, you gain a liability (debt) and an asset. Your assets and liabilities increase by $2,000, so the equation looks like:

$2,000 Assets = $2,000 Liabilities + Equity

Example 3:

As your T-shirt company grows, you get an order for 50 shirts from a customer. The customer pays $10 per shirt, or $500 total. You gain an asset and equity from the transaction:

$500 Assets = Liabilities + $500 Equity

Example balance sheet:

You will record each of the above transactions on the balance sheet. The assets should equal the liabilities plus equity. Here is what the balance sheet looks like:

accounting equation

Here is the full accounting equation for this example:

$12,500 Assets = $2,000 Liabilities + $10,500 Equity

Explanation: