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The accounting environment

9.3 The accounting equation

The accounting equation makes use of three of the elements of the financial
statements as follows:

Assets – Liabilities = Capital

Or, it can be restated as:

Assets = Capital + Liabilities

It therefore demonstrates the relationships that exist within any business entity. The
equation is the basis of one of the most common accounting statements prepared –
the statement of financial position.

This equation will form the basis of much of your studies for this subject to record
accounting transactions. It will be considered in further detail in subsequent chapters
of this publication. Consequently, it is important that you understand the following
distinctions:

 between capital and revenue transactions, and

 between cash and profit.

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