Concise Notes on Accounting Equation & Double Entry

Accounting Equation and Double Entry

Key Concepts

• Double-Entry Bookkeeping: A system where each financial transaction is recorded twice, reflecting the dual aspects of the transaction.

• Accounting Equation:

  • Basic form: $Assets = Liabilities + Equity$

  • Expanded form: $Assets + Expenses = Liabilities + Equity + Income$

• Assets: Items owned or controlled by the business (e.g., property, plant, equipment, current assets like inventory).

• Liabilities: What the business owes to third parties (e.g., short-term payables, long-term loans).

• Equity: The owner's stake in the business; calculated as Capital (investment) minus Drawings (withdrawals) plus Income minus Expenses.

• Income: Revenue and gains.

• Expenses: Outflows and losses.

• Debit and Credit:

  • Assets and Expenses increase with debit entries (left-hand side of a T-account).

  • Income, Liabilities, and Equity increase with credit entries (right-hand side of a T-account).

• Basic Rules:

  1. Every transaction has a debit and credit entry.

  2. Total debits must equal total credits.

  3. In the cash/bank book, inflows are debits and outflows are credits.

• Bank Account: Debit side represents money coming in, credit side represents money going out.

• Balancing Off: The process of equating the total debits and credits in an account to determine the balance; this balance is carried forward.

• Trial Balance: A list of all debit and credit balances, used to ensure the accounting equation is in balance.

• Financial Statements:

  • Statement of Profit or Loss: $Income - Expenditure = Profit$

  • Statement of Financial Position: $Assets = Liabilities + Equity$

Double-Entry Checks

• Revenue accounts should never have debits, and purchase accounts should never have credits.

• Sales returns accounts should never have credits, and purchase returns accounts should never have debits.

• Non-current assets and expenses should not be credited when making initial entries.