The Accounting Equation with Real Life Examples ExamSuccess Blog


Essentially, anything a owes and has yet to pay within a period is considered a liability, such as salaries, utilities, and taxes. Notice that the balances in our equation did not change. What did change was the makeup of the assets held by the business. In this part of the course, it is important to understand that the equation must be in balance at all times. As we progress through the course, we will look in greater detail at the individual accounts that make up total assets, liabilities, and equity.

  • Because this revenue was generated because a service was provided, you might call it service revenue or fees earned.
  • Because there are two or more accounts affected by every transaction carried out by a company, the accounting system is referred to as double-entry accounting.
  • Salaries expense is an expense account so it is increased with debits.
  • Thus, the asset and liability sides of the transaction are equal.
  • This means that the expenses exceeded the revenues for the period, thus decreasing retained earnings.

Closing entries also transfer the debit balances of expense accounts into Retained Earnings, causing it to decrease. Accounts payable recognizes that the company owes money and has not paid.

Overview: What is the accounting equation?

Changes in and liabilities caneitherincrease or decrease the value of the organization depending on the net result of the transaction. Answers will vary but may include vehicles, clothing, electronics (include cell phones and computer/gaming systems, and sports equipment). They may also include money owed on these assets, most likely vehicles and perhaps cell phones.

The journal entries are posted to the ledger sequentially. Accounts receivable are amounts owed to the company by customers who have received products or services but have not yet paid for them. The balance sheet is a report that summarizes a business’s financial position as of a specific date. It is the culmination of all the financial information about the business—everything else done in the accounting cycle leads up to it.


These are the, liability, stockholders’ equity, revenue, expense, and dividend accounts. Decreases cash and decreases retained earnings Payment of dividends reduces cash and increases dividends. Dividends is a temporary account that will be closed at the end of the period and closing it will cause retained earnings to decrease. The ability to read financial statements requires an understanding of the items they include and the standard categories used to classify these items. The accounting equation identifies the relationship between the elements of accounting. Represents a customer’s advanced payment for a product or service that has yet to be provided by the company. Since the company has not yet provided the product or service, it cannot recognize the customer’s payment as revenue, according to the revenue recognition principle.

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