Equation

After knowing the Elements and Rules, let's now do some computation. We need to analyze the business transaction, we can done it through the accounting equation:

The accounting equation is:

Assets = Liabilities + Owner's Equity

The left side of the equation shows the Assets while the right side show who provide the funds or resources needed by the business. The amount and the composition of the assets, liabilities, and owner's equity change as the business engages in economic activities. However, the equality of the accounting equation holds. Equity means the rights to properties. There are two equities: the equity of the creditors which refers to liabilities and the equity of the owner or the owners referring to capital.

In the accounting equation, liabilities is placed ahead of owner's equity because creditors have preferential rights on assets of the business.

Alternative ways of expressing the equation are:

Assets - Liabilities = Owner's Equity

Assets - Capital = Liabilities

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