Chapter 2: The Accounting Equation

Question 1

2.1 Introduction

Answer 1

Accounting is concerned with recording the transactions of a business. The system to record transactions is known as the double entry system of bookkeeping.
Double entry system states that all transactions have a dual effect, this principle forms the basis of accounting. For example, when a business buys stock, it has more stock and less cash.
The accounting equation is a simplified version of the balance sheet, it shows net assets always equals the proprietor’s funds or:
Assets – liabilities = capital (amount owner has introduced to the business) + profits – drawings
The accounting equation can be applied in the situation where a business has traded for many years. The equation can be revised by stating an increase in net assets must equal an increase in the proprietor’s funds. Or the movement in net assets equals the profit for the period plus capital introduced in the period less the drawings for the period.