What is accounting equation with examples?

The accounting equation represents the relationship between assets, capital, and liabilities of a business. It follows the concept of the double-entry bookkeeping system where every debit has an equal credit. The rules state that at any time a business’ assets should equal liabilities. This is also known as the statement of financial position equation.

The accounting equation can be shown as follows:

  Assets = Capital + Liabilities

For example, Liza starts a business by investing $3,000 as cash. In accounting terms, business and owner are separate and so business owes money to Liza as capital.

In this example,

Capital invested = $3,000

Cash (Asset) = $3,000

If Liza puts this into the accounting equation, it will be shown as:

Further, Liza purchases a market stall from Ben and the cost of the stall was $1,800. She purchases flowers from the wholesale market at a cost of $700. Now she is left with $500 cash out of the original $3,000.

The state of her business has now changed and can be shown as follows: