Page 8 - cfi-Accounting-eBook
P. 8
The Corporate Finance Institute Accounting
The Accounting Equation
To learn more, please Whenever a company records a transaction, three key financial
check out our free online components must always be kept in balance: assets, liabilities, and
accounting courses equity. This is referred to as the accounting equation:
View courses Assets = Liabilities + Equity
For example, if a company purchased a vehicle for $50,000 in cash,
assets would both go up and down by $50,000. The company has gained
an asset (i.e. the vehicle) while losing as asset (i.e. cash) by purchasing
the car. Hence, the accounting equation remains intact. In another
example, if a company borrows $100,000 from a bank, the company’s
cash asset account goes up as well as the company’s liability account.
Because both assets and liabilities go up by $100,000, the accounting
equation remains intact. All transactions must follow this general rule to
implement proper financial reporting. If the accounting equation is not
balanced, you know that something has gone wrong and need to make
the necessary changes.
corporatefinanceinstitute.com 8
