Accounting Equation


Transactions that only affect Assets of the entity

These transactions result in an increase in one asset which is equally offset by a decrease in another asset and vice versa.

Diagram illustrating increase or decrease in an asset result same increase or decrease in other asset

Since Assets, and other components of the equation, will be the same as before the transaction, the Accounting Equation will be in equilibrium.

Example 1

ABC LTD purchases a machine costing $1000 for cash.

Before Transaction: Assets $10,000 - Liabilities $5,000 = Equity $5,000

After Transaction: Assets $10,000* - Liabilities $5,000 = Equity $5,000

* Assets $10,000 = $10,000 Plus $1,000 (Machine) Less $1,000 (Cash)

Example 2

ABC LTD receives $500 cash from a receivable DEF LTD in respect of goods sold on credit.

Before Transaction: Assets $10,000 - Liabilities $5,000 = Equity $5,000

After Transaction: Assets $10,000* - Liabilities $5,000 = Equity $5,000

* Assets $10,000 = $10,000 Plus $500 (Cash) Less $500 (Trade Receivable)