May 012007
The Accounting Equation is:
Assets – Liabilities = Capital
which is the same as:
Net Assets = Captial.
For example, Tina T invests £1,200 in her business.
Therefore, the business has:
Assets of £1,200 (because the money has now become an asset of the business).
Liabilities of £1,200 Capital and no other liabilities.
So, the accounting equation is quite simply: £1,200 (assets) = £1,200 (capital)
Accounting Equation with profit
If Tina buys a stall for £1,000; has cash sales of £400 and the goods had cost £200. Tina has earned a profit of £200.
The accounting equation would then be:
£1,000 (asset of the stall) + £400 (asset, cash from the sales) = £1,200 (original capital) + £200 (profit retained in the business)
