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The accounting equation
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One simple equation sits underneath all of double entry bookkeeping. If you understand it, the rest of the course makes much more sense.
The equation
Assets = Capital + Liabilities
Everything the business owns (assets) was paid for either by the owner (capital) or by someone else (liabilities).
Rearranged: Capital = Assets − Liabilities.
Everything the business owns (assets) was paid for either by the owner (capital) or by someone else (liabilities).
Rearranged: Capital = Assets − Liabilities.
Using it
A business has assets of £45 000 and liabilities of £12 000.
Capital = 45 000 − 12 000 = £33 000.
Check: 33 000 + 12 000 = 45 000. Both sides balance.
Capital = 45 000 − 12 000 = £33 000.
Check: 33 000 + 12 000 = 45 000. Both sides balance.
Every transaction has two effects
A business has assets of £30 000 and capital of £22 000. What are its liabilities?
- Assets = Capital + Liabilities
- Liabilities = Assets − Capital = 30 000 − 22 000
Answer: £8 000
Assets = Capital + Liabilities. Capital = Assets − Liabilities. Every transaction has two effects, and the equation always stays in balance.
The interactive lesson includes the diagrams for this topic.
Check you have got it
Answer 6 quick questions with instant marking. If you get one wrong, GCSE-ready shows you why and gives you another go. It is free, and you do not need an account.