Accounting Equation

I recall vividly how I struggled with accounting at the University. The subject was a hard nut to crack. I barely made it through the course. It got to a point where I promised myself that I was not going to have anything to do with the course. As life would have it, I found myself in the classroom writing exams to become a professional accountant.

Seven years after qualifying as a chartered accountant, I find myself sitting in the Classroom again, but this time at the Lagos Business School. It was my first Corporate Financial Accounting Class.

In my head, I was like what can these people teach me again!!!! but to my pleasant surprise, I was reschooled.

The lecturer simplified accounting that even a layman could understand it. What struck me the most in the first class was the Accounting Equation. Accounting Equation is the basic foundation of double entry principle. If you can understand this basic principle, your accounting challenges are half way solved.

The accounting equation is the fundamental equation of the balance sheet. It is basically what you see in a company’s balance sheet.

Accounting equation states that Total Assets= Liabilities + Equity

What is an asset: An asset(s)are the resources in which the company owns.

Liabilities are financial obligations or debts that the company owes.

Equity is the owner’s contribution to the business.

Total Asset which is on the left side is a debit transaction on the journal while the right hand side is a credit transaction. Whatever happens at one side of the equation impacts the other side of the equation.

Let me use an example to illustrate this principle. Totesh enterprises plans to start a Keke Napep business. She has a saving of the sum of N500,000 and intends to use the sum to buy Keke. On getting to the seller, she found out that the cost of the Keke is now N1,000,000. She then had to approach her friend Nimi to loan her N500,000 . Totesh Eventually buys her Keke for the sum of N1,000,000.

A= L+E

1,000,000= 500,000+500,000

In this example the Asset of Totesh is the Keke which she bought with the N1,000,000. It is the use of this Asset that will in return bring in sales for the organization. Remember, Totesh borrowed 500,000 from her friend to add to her savings for the purchase. This N500,000 is a debt/liability. Totesh owes this amount,

The equity is the 500,000 Totesh took from her savings to buy this asset. It is her own contribution to the company. This is one of the reasons why it is called owners equity. The left side of the Accounting equation must always be equal to the right side of the equation.

The accounting equation can also be rearranged. We can re-write it by Owners equity= Asset- Liability.

The accounting equation represents how important these three items are to a business.

Accounting Equation can be equated to laying a foundation to build a house in the accounting world. #EMBA27