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Chapter 3

The accounting equation

2.1 Reminder of the accounting equation

In previous chapters we have introduced the accounting equation. This can be
expressed as:

Assets = Equity + Liabilities

or

Assets – Liabilities = Equity

Note that the image above used the term 'equity' which is an alternative term to
'capital' when dealing with the accounting equation.

The statement of financial position shows the position of an entity at one point in
time. A statement of financial position will always satisfy the accounting equation as
shown above.

The accounting equation is a simple expression of the fact that at any point in time
the assets of the entity will be equal to its liabilities plus its equity.

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