Accounting Equation


Transactions that affect Assets and Liabilities of the entity

These transactions result in the increase in Assets and Liabilities of the entity simultaneously. Conversely, the transactions may cause a decrease in both Assets and Liabilities of the entity.

Diagram illustrating transaction affecting both asset and liabilities

Any increase in the assets will be offset by an equal increase in liabilities and vice versa causing the Accounting Equation to balance after the transactions are incorporated.

Example 1

ABC LTD receives $2,500 bank loan in cash.

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

After Transaction: Assets $12,500* - Liabilities $7,500* = Equity $5,000

*Assets $12,500 = $10,000 Plus $2,500 (Cash)

*Liabilities $7,500 = $5,000 Plus $2,500 (Bank Loan)

Example 2

ABC LTD pays $500 cash to XYZ LTD for goods purchased on credit.

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

After Transaction: Assets $9,500* - Liabilities $4,500* = Equity $5,000

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

*Liabilities $4,500 = $5,000 Less $500 (Trade Payable)