Accounting Equation

Accounting equation is the basis of double entry system of accounting. In double entry accounting, we make a debit and a credit of the same amount. As a result, the whole accounting system remains in the balance. We described the equation as follows:

Assets = Equity + Liabilities

Assets are company’s resources which the company uses to derive future economic benefits. They may be current assets and non-current assets. Current assets are those which are expected to be converted into cash or cash equivalent within the 12 months period such as cash in hand & at bank, stock, accounts receivable, prepaid expenses etc. On the other hand, which are expected to be converted into cash over the period of 12 months are described as non-current assets such as land & building, property plant & equipments, machinery, fixture & furniture, computers etc.

Equity is the amount or investment which is contributed by the owners or shareholder’s of the business to start the operations. This involves cash investment and other assets directly injected to the business by the owners and shareholders. Cumulative net income which is not distributed to the shareholders is also a part of equity.