BA1 Lesson #8 - The Accounting Equation and Making Tabular Analysis

On our last topic you have learned how to analyze business transactions and you are able to identify the affected accounts. This time, we will discuss the accounting equation.

It is very important for you to know the accounting equation because at the date of financial statements preparation, your total assets must equal to the sum of your total liabilities and your total capital.

Many times you will encounter a problem that asks for the total liabilities and with a strong grip in this equation, you can find the unknown value.

Below is the equation that must be true all the times. In case your total assets and the sum of total liabilities and total capital do not equal, you must have analyzed a transaction erroneously.

To prove that the accounting equation is true all the times, tabular analysis is done. Note that making tabular analysis is not a part of an accounting process. This is just a tool for beginners to grasp the equation excellently.

Consider the following transactions and check on our tabular analysis how the transactions affect the accounts and how we maintain the truthfulness of the equation.

1.    Invest $250,000 cash, $120,000 worth of equipment and $10,000 worth of office supplies.

2.    Purchase a machine on account $15,000

3.    Rendered services for $1,000 on account

4.    Paid $7,800 for the outstanding account in transaction (b)

5.    Collected the accounts in transaction (c) in full amount

6.    Used $1,500 worth of office supplies

7.    Purchased company’s computer for cash, $25,000

8.    Rendered services for cash, $1,500

9.    The owner withdrew $10,000

10.  The total payroll is $15,000, paid half of it, and accrue the other half

11.  Total of repair expense, telephone bill, and electric bill is $2,500. All are paid.

Click the image to enlarge and see how transactions occur and satisfy the accounting equation

Transactions results to different scenarios and affect the accounting equation. The following are the summary of the possible effects of a transaction in the equation:

1.    Increase in asset, decrease in another asset

2.    Increase in asset, increase in capital

3.    Increase in asset, increase in liability

4.    Decrease in asset, decrease in liability

5.    Decrease in asset, decrease in capital

6.    Increase in liability, decrease in capital

7.    Decrease in liability, increase in capital

8.    Increase in liability, decrease in another liability

9.    Decrease in capital, increase in another capital

Note that this is for illustration purposes and you do not have to memorize these. Making a tabular analysis is easy if you master analyzing transactions. Go and test yourself if you know how to analyze transactions with our problems and exercises. There are also printable exercises for tabular analysis available for you!