The Accounting Equation

The Accounting Equation is:

Assets – Liabilities = Capital

which is the same as:

Net Assets = Captial.

For example, Tina T invests £1,200 in her business.
Therefore, the business has:
Assets of £1,200 (because the money has now become an asset of the business).
Liabilities of £1,200 Capital and no other liabilities.

So, the accounting equation is quite simply:  £1,200 (assets) = £1,200 (capital) 

Accounting Equation with profit
If Tina buys a stall for £1,000; has cash sales of £400 and the goods had cost £200.  Tina has earned a profit of £200.

The accounting equation would then be:

£1,000 (asset of the stall) + £400 (asset, cash from the sales) = £1,200 (original capital) + £200 (profit retained in the business)


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