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Thursday, October 22, 2009

The Accounting Equation

The rule that the assets of a business will at all times Equal its liabilities. This is also known as the balance sheet equation.
Assets = Capital + Liabilities

In accounting capital is an investment of money with the intention of earning a return. A business proprietor invests capital with the intention of earning profit. As long as that money is invested, accountants will treat the capital as money owed to the proprietor by the business.

Assets and liabilities we define in our previous post.

Drawings are amounts of money taken out of a business by its owner.

The business equation
The business equation gives a definition of profits earned.
P = I + D – Ci
P = Represents profit
I = Represents the increase in net assets, after drawings have been taken out by the proprietor
D = Drawings
Ci = the amount of extra capital introduced into the business during the period

A creditor is a person to whom a business owes money. A trade creditor is a person to whom a business owes money for debt incurred in the course of trading operation. A creditor is a liability of a business.

A customer who buys goods without paying cash for them straight away is a debtor. A debtor is a asset of a business.


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