What is the Accounting Equation?

Accounting identity refers to a relational formula in which all accounting elements must be equal in total. It reveals the relationship between the elements of accounting objects, and is the theoretical basis for double-entry bookkeeping and preparation of accounting statements. Its accounting identity is not the same in different accounting periods.

Accounting identity

The accounting identities reform the original accounting formula, that is, "total capital occupancy = total funding sources", and replaced it with accounting identities that can reflect the rights and obligations of the enterprise as a legal person: "assets + expenses = liabilities + owner's equity + income".

The first accounting equation reflects the static state of corporate capital movement, that is, a certain day in the operation of the enterprise, which is generally the start date or the settlement date; and the second equation reflects the corporate capital movement. All Assets are used to make money, and once assets are used and income is obtained, assets are converted into expenses, and income minus expenses is profit, also called

Owner's equity should include creditor's equity (liability) and investor's equity (shareholder's equity), and the equity must be the owner's equity, not the interest of those who have nothing to do with ownership; for this reason, the owner's equity can be referred to simply as equity. To simplify accounting identities, make them highly general

Accounting identity is reflected

Accounting Equation (1): Assets = Liabilities + Owner's Equity, ie: Capital Use = Source of Funds.

This formula is the basis of accounting and accounting, and also the basis of compiling the balance sheet. It shows how much shareholders and creditors account for the company's assets. When the liabilities remain unchanged, assets and owner's equity change in the same direction. When the owner's equity remains unchanged, assets change in the same direction as liabilities. When the owner's equity and liabilities change, the change in assets is equal to both. with.

Accounting Equation (2): Revenue-Expense = Profit (or Loss), ie: Get-Pay = Earn (or Lose) The goal of the business is to make money, and only the income obtained offsets the money spent on this income. There are still expenses remaining, and the company is considered profitable.

Accounting equation (3 integrated): assets = liabilities + owner's equity + income-expenses

Accounting identity

In the operation of an enterprise, the profit in "income-expense = profit" indicates that the cash inflow is greater than the cash outflow, that is, the enterprise's assets increase. On the other hand, at this moment, the liabilities remain unchanged, and the profit and compensation are both shareholders.

New owner's equity = old owner's equity + profit = old owner's equity + income-expenses; while, new asset = liability + new owner's equity = liability + old owner's equity + income-expenses