The Accounting Equation Reading Activity

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The Accounting Equation Reading Activity


Every transaction will affect two or more accounts. Net worth is the value of the assets a person or corporation owns, minus the liabilities they owe. The global adherence to the double-entry accounting system makes the account keeping and tallying processes more standardized and more fool-proof. Debt is a liability, whether it is a long-term loan or a bill that is due to be paid. The major and often largest value asset of most companies be that company’s machinery, buildings, and property. These are fixed assets that are usually held for many years. The statement of owner’s equity shows the state of the business on a specific date.

On 5 January, Sam purchases for $20,000 on credit. As a result of the transaction, an asset in the form of merchandise increases, leading to an increase in the total assets. In this expanded accounting equation, CC, the Contributed Capital or paid-in capital, represents Share Capital. AOCIL is added for income or subtracted for loss.

What is the Expanded Accounting Equation?

The equation says sorry. So what is going on in this case? This is what our accounting question sees. The meaning of accounting is unknown. If you sell foods and beverages to your customers, you have a business. One of your customers frequently buys food and beverages from you and says that he will pay you a terrible Regulator. Do you have a receivable against the food you sold?


The trial balance includes columns with total debit and total credit transactions at the bottom of the report. While the basic accounting equation may appear simple, it can grow more complicated in practical use. Let’s look at a few examples to depict how transactions can affect the accounting equation. Let’s start with the first example. In this form, it is easier to highlight the relationship between shareholder’s equity and debt .


A business’s liabilities are what they owe or have to pay to continue operating the business. Debt, including long-term debt, is a liability that can be overwhelming for any company if not managed properly. Other types of liabilities include rent and taxes, which businesses must pay in order to operate successfully. If essential payments like these or utilities go unpaid for too long, they can become liabilities as well. So, summarizing this whole thing starts with a basic accounting equation.

You don’t need to use the company’s Cash Flow Statement to compute the accounting equation. This equation is “expanded” because assets and liabilities are not the same things.


A general ledger is a record-keeping system for a’s financial data, with debit and credit account records validated by a trial balance. The double-entry practice ensures that the accounting equation always remains balanced, meaning that the left side value of the equation will always match the right side value. Essentially, the representation equates all uses of capital to all sources of capital, where debt capital leads to liabilities and equity capital leads to shareholders’ equity.

Are there examples of accounting equations?

Yes there are many examples of Accounting Equation diagrams. Some of them are given below: 2 3 4 You can also go to the Accounting Equation generator to generate your own Accounting Equation diagram. The best thing about this tool is that you can add and remove elements from the diagram based on the context of your question.

Current liabilities include accounts payable, accrued expenses, and the short-term portion of debt. In a corporation, capital represents the stockholders’ equity.

Effect of Transactions on the Accounting Equation

Alphabet is a tech company that doesn’t pay dividends. From the Statement of Stockholders’ Equity, Alphabet’s share repurchases can be seen. Their share repurchases impact both the capital and retained earnings balances. A screenshot of Alphabet Inc Consolidated Balance Sheets from its 10-K annual report filing with the SEC for the year ended December 31, 2021, follows. Alphabet Inc is the parent company of Google. As our example, we compute the accounting equation from the company’s balance sheet as of December 31, 2021. Note that amounts are in millions of dollars.

The fundamental components of the accounting equation include the calculation of both company holdings and company debts; thus, it allows owners to gauge the total value of a firm’s assets. The accounting equation helps to assess whether the business transactions carried out by the company are being accurately reflected in its books and accounts. Below are examples of items listed on the balance sheet.

Mohanasree Ramachandran

Mohanasree Ramachandran

Interior designer, Stylist & Lecturer.

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