Accounting Equation


Transactions that affect Assets and Equity of the entity

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

Diagram illustrating transaction effecting both Asset and Equity of the Company

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

Example 1

ABC LTD issues share capital for $2,500 in cash.

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

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

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

*Equity $7,500 = $5,000 Plus $2,500 (Share Capital)

Example 2

ABC LTD pays dividend of $500 in cash.

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

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

*Assets $9,500 = $10,000 Less $500 (Cash)

*Equity $4,500 = $5,000 Less $500 (Divident)