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The Complete Guide to Accounting Equations

Financial Accounting

The Complete Guide to Accounting Equations

I have heard thousands of question throughout my career in accounting for 17 years. The most common were the question of whether there is a shortcut to mastering accounting.

Obviously, the answer is “NO,” isn’t it?

Now, what if I told you that I have a way to help you achieve that goal faster?

“What is that way?” you may ask.

Master the technical and mechanical aspect of accounting!

The rest, you can learn as you go.

“What are those technical and mechanical aspects of accounting?” you may ask again.

These:

  • The double entry accounting system; and
  • The accounting process referred to as “accounting cycle.”

To be able to master the former, you must be extremely good in the accounting equations and debit-credit procedures. As for the later, you have to be good in identifying, recording, summarizing, and reporting the financial transaction.

Here, at accountinglog.com, I discuss both of them a lot, to make sure you have a strong foundation before moving on to more advanced kinds of accounting skill.

 

In this post, you are going to learn accounting equations. A basic stuff but is crucial to your success acquiring accounting skill. 

Let’s start with a simple question.

 

Why Accounting Equations?

Accounting is a hard skill. I mean, there are technical aspects of accounting that need special training to be able to acquire it.

And if the skill is obtained from school or course, you still have to prove your ability by applying it in the real world.

Anyone can say “I’m a Bachelor of Accounting with a GPA of 3.8 and graduated with cum laude.” But who cares if it can’t be shown in the real world.

I have been at the management level for 15 years. In this level, I act as a hiring manager when accounting and finance dept hiring new staff. Here are two types of entry-level candidate I find often:

  • Those candidates who have no idea about how to record financial transactions; AND
  • Those candidates who are able to record financial transactions. But then lost confidence when dealing with complex cases.

The former are (excuse me) craps. I mean, seriously, they should go back to school immediately. Or, at least, take a bookkeeping course. Learn accounting equation and debit-credit procedures.

And the later would need to master the mechanic of accounting. Not merely memorizing, they need to really understand the concept behind it. They should know the link between the elements of the financial statements. They should know the accounting assumptions and principles. And, on top of that, they MUST BE able to apply all of those things into practice, in the real world.

I love accounting. I want to become a great accountant one day. But, these cases are too complicated to me,” one of them asked for an excuse.

Let me show you a simple logic:

#1. Accounting is for those who see complexity as an excitement.

#2. Mastering it or becoming a great accountant need serious commitment.

#3. You must obsess to make yourself extremely good in those mechanical aspects of accounting.

#4. If not, then it’s a lip service desire that will not change anything.

What I want to say here is that to start a career in accounting at least you have to master the technical and mechanical aspects of accounting.

And, accounting equation is the core logic behind the mechanic of accounting. The equation is also the foundation of the double-entry accounting system. A system that used by bookkeepers to records business activities, such as:

  • receiving a capital contribution;
  • purchasing an office building;
  • purchasing equipment;
  • purchasing inventory;
  • purchasing supplies;
  • making products;
  • paying vendors/suppliers;
  • paying payroll and wages;
  • selling products;
  • receiving returned products;
  • having defected/obsoleted products;
  • providing discounts;
  • collecting payments;
  • paying taxes; and
  • so on.

Though, accountants are more advanced than bookkeepers. They eventually embed the accounting equation in their subconscious mind and recall that logic as a kind of basic instinct when:

  • reviewing ledgers;
  • making adjustment and correction entry;
  • compiling and generating financial statements;
  • interpreting and analyzing financial statements; and
  • generating and evaluating annual budgets.

The auditors also use that exact same logic when conducting a financial audit.

With a good grasp on the accounting equation, you can learn debit-credit procedure easier. These then help to ease your way mastering the mechanic of accounting.

If you are a beginner and aware of any shortcomings in those particular aspects, no need to feel guilty, though. In fact, even a master once was a beginner, like you and me. The solution is to continue to learn as you go, from the seniors and your own experience.

This profession indeed requires a continuous learning. The NASBA in the U.S. requires CPAs to Continuing Professional Education (CPE), or they lose the CPA credential. As an accountant myself, I am still learning until today. Writing this tutorial is one of my effort to keep my skill sharpened.

And this, as far as I experienced and seen myself, has nothing to do with IQ numbers. If you’re smart, that’s great. But much more important here is whether you love it or not.

 

Love it Or Leave it

If accounting is an important skill for your career, then you must love accounting equation and the concept behind it. Otherwise, you’d better get other skills that you love.

Why?

Because accounting equations are the core logic behind the accounting process. And understanding is not enough. To master it, you must embed that understanding deep in your subconscious mind. Make that logic as the part of your basic instinct. Means, the logic will stick in your mind for the entire lifetime of your career (if not your lifetime.)

I am serious. No joke here.

If that sounds no good for you, then forget about accounting skill.

I’m sorry if it sounds harsh but please understand that I did it with love. Learning Accounting takes dedication and totality. This can’t be done half-heartedly. And, I want you to be successful.

The good news is that the accounting equation is not something complicated at all. It is a simple algebraic formula that represents the relationship between the elements of the financial statements. If you know basic mathematical equations, such as 10 = 8 + 2, then you can understand it without any hassles. The rest is a matter of whether you love it or not, have a willingness to learn or not, want to commit or not, determined to succeed or not.

As an extra takeaway, in this post, I will also share a kind of mental exercise techniques. You can apply the technique to memorize the logic behind the accounting equation. With this exercise, you can embed the logic in your subconscious mind and use it as the part of your basic instinct.

Let’s start with the basic equation.

 

The Basic Accounting Equation

The basic equation represents the relationship between elements of the Balance Sheet. And it is often referred to as “balance sheet equation.” Here is the equation:

A = L + Eq

Whereas:

A = Assets (the economic resources that are owned by a company)
L = Liabilities (the company’s obligations to pay other parties in the future)
Eq = Equity or Stockholder’s Equity (the remaining claim against the asset, after the liability have been deducted.)

“How do I read the equation?” you may wonder.

Here how you read it:

“Assets equals Liabilities plus Equity”

This is simple, isn’t it? So simple that people do not see the need to find out what the meaning and the intent of this simple equation. I suspect, such overlooking behavior responsible for the entry-level staff that knows how to make journal entries but don’t know what the effect of these entries on the financial statements.

Behind the simplicity of this equation, there is a vital logic that you have to understand, as follows:

To be able to operate, a company owns and uses some resources called ‘Assets.’ Those assets contain creditors’ claims called ‘Liabilities’ plus owners’ claim called ‘Equity.’

Two alternates way to approach the logic are as follows:

#1. A company has and uses ‘Assets’ to operate. Those assets are financed by ‘Liability’ and owner’s Equity.; Or

#2. A company uses ‘Liabilities’ and ‘Owner’s Equity’ to get enough funding for the ‘Assets’ its needs to operate.

All of those logics suggest that, if at any time the company closed down, then it will use the asset to fulfill its liabilities first of all. And pay the shareholders or owners of the company with the rest of the assets.

The most important thing to understand from this logic is that the Assets (on the left side) are always balanced with the Liabilities plus Equity (on the right side.) If not, then this can’t be called an equation. In the same sense, a balance sheet is not correct when the value of the Assets does not equal to the value of the Liabilities plus Equity.

If you need a visual presentation, I posted “The Beginner’s Guide to Financial Statements” where you can find an example of a balance sheet in a U.S. format. But, for the sake of easier memorizing, I tweaked that into the following format and put the basic equation on the top:

Accounting Equation above a Balance Sheet

Have a look at the above balance sheet. You will notice the followings:

  • Group of ASSETS (on the left side)
  • Group of LIABILITIES and group of EQUITY (on the right side)
  • What is on the left side MUST BE BALANCED with what are on the right side

 

Remember two things:

Both side must be balance

 

FYI: Balance is a Sacred Word

To keep the balance sheet always in a balanced state, every transaction must be accounted by using that equation and its logic, which must be always balanced.

That is why the “balance” becomes a kind of sacred words among accounting people in a company.

They are relieved and smile often when finding the balance sheet balanced. They know that the accounting equation has been met (though not necessarily completely correct.)

In contrary, they’re depressed and probably fret all day long when finding the balance sheet is not balanced. They know there must be something wrong in the accounting process that they run.

Up to this point, I hope you get the logic behind the basic equation. So the next time you receive a bill, before recording it, you must realize that one side of the balance sheet will change. And that change must be balanced by changes in the other side of the balance sheet, so both stay balanced.

That said, you must always record a transaction in pairs. This is what is called “double entry accounting system.” I will discuss this system and debit-credit procedures in the coming post. Hopefully next week. In this post, you are focusing on the accounting equation and get a strong foundation.

The basic equation represents the relationship between elements of the balance sheet. This means that

You use this basic equation only for transactions involve balance sheet’s elements (i.e., assets, liabilities, and equity.)

Now, using the balance concept let’s test your basic instinct with something that you can easily relate to.

Step-1. Have a look at your smartphone and ask yourself “Is this an asset?” (Hint: if the smartphone gives you some sort of benefit and you can sell it to get some cash, then yes it is an asset.)

Step-2. When you got the asset (smartphone), the balance wasn’t balanced because you put an asset on the left side, wasn’t it? So, what have made your balance stay balanced? (Hint: either you drown another asset away of the left side or you added a liability on the right side.) Think about it and answer yourself.

Step-3. Do step #1 and #2 above for any kinds of stuff you have. Remember that the balance must be always balanced so everytime you get a benefit always balanced by an addition on liability (read: obligation) or a loss on other assets.

That is a personal matter. Let’s move on to a business environment. How the accounting equation is used in the real business world.

Case Example:

(a) Asset Increase vs Liability Increase: ABC Company (a flower store) purchased 100 flowers from a gardener for $2500 in credit. For ABC, the 100 flowers are Inventory which will be sold to customers, and Inventory is an asset. Since the flowers were purchased in credit, means that ABC has a liability to the gardener. So the equation is:

A = L + Eq (the accounting equation OR the balance sheet equation)

$2500 (inventory) = $2500 (accounts payable) + 0 (has no effect)

$2500 = $2500

Therefore, ABC owned inventory asset $2500 (on the left side of the balance sheet) and owed liability $2500 (on the right side of the balance sheet); the balance sheet is in a balanced state.

(b) Asset Increase vs Equity Increase: Mrs. George, one of the ABC Company’s owner, deposited $75000 cash into the ABC Company’s checking account as a capital contribution. For ABC, the deposited cash become an asset. Since the cash was deposited as a capital contribution, it then is recorded as an equity. Therefore the equations is:

A = L + Eq

$75000 (cash) = 0 (has no effect) + $75000 (capital contribution)

$75000 = $75000

So, ABC owned cash assets $75000 (on the left side of the balance sheet) and a claim of the owner $75000 (on the right side of the balance sheet); the balance sheet is balanced.

(c) Asset Increase vs Asset Decrease: ABC Company. later on, purchased equipment to support its operation for $7000 in cash. On the ABC’s book, the equipment is an asset. Since it was a cash purchase, ABC’s cash asset got decreased. So the equation is:

A = L + Eq

$7000 (equipment) – $7000 (cash) = 0 (has no effect) + 0 (has no effect)

0 = 0

Therefore, ABC owned equipment asset $7000 (on the left side of the balance sheet) but has less cash by $7000 (on the left side of the balance sheet); the balance sheet remains in a balanced state.

(d) Asset Increase vs Asset Decrease and Liability Increase: To support its operation, ABC Company purchased a small truck for $20000. Out of $20000, 25% was paid in cash as a down payment and the 75% balance became loan mortgage. In this case, on the first side ABC has a new truck which is an asset but on the other side, it has less cash asset by $5000 and a new liability for $15000. So the equation is:

A = L + Eq

$20000 (truck) – $5000 (cash) = $15000 (mortgage loan) + 0 (has no effect)

$15000 = $15000

Therefore, in this transaction, ABC owned asset $15000 (on the left side of the balance sheet) and owed a new liability for $15000 (on the right side of the balance sheet); the balance sheet stays balanced.

(e) Asset Decrease Vs Liability Decrease: ABC Company paid its payable to the gardener for $2500 (see example #1.) This reduces ABC’s cash asset (on the left side of the balance sheet) and reduces accounts payable liability (on the right side of the balance sheet.) So the equation is:

A = L + Eq

-$2500 (cash) = -$2500 (accounts payable) + 0 (no effect)

-$2500 = – $2500

So, in this case, the assets decreased by $2500 and the liabilities also decreased by $2500; the balance sheet remains balanced.

If we recap those five transactions and put them into one spreadsheet, here how they look:

 

Accounting Equation Example

Have a look at the header on the top. It shows “Assets” on the left side and “Liability+Equity” on the right side. If merge them, it then shows “Asset = Liability+Equity.”

Next, have a look at the bottom of the spreadsheet. It shows “Total” amount of all transactions, with the followings amount:

  • On the left side, the Assets column shows $90000
  • On the right side, the Liability column shows $15000 + the Equity column shows $75000, equal $90000

So, both side shows the same value, which is $90000. It means they are balanced!

And here how they look when we put them on a balance sheet:

Balance Sheet Equation Example

Observe the numbers:

  • Total Assets = $90000
  • Total Liability $15000 and Equity $75000 = $90000

Both sides show the same numbers, which is $9000. It means they are balanced!

Do you think you can generate a balance sheet? Great if you think so. I love the “I can” spirit. If not, do not worry, though. At least you have understood the logic behind it, haven’t you?

Final reminder for this part:

Use the basic accounting equation (Assets = Liabilities + Equity) for transactions that ONLY involves balance sheet’s elements.

“What if a transaction involves activities of selling and spending?”

Great question.

Every business is certainly doing selling and spending activities. Thus, YES, these two activities always occur within the company.

Selling products (or rendering services in a service company) is a revenues transaction. While buying products (or buying services) from other parties is an expenses transaction.

Both ‘Revenues’ and ‘Expenses’ are the elements of the Income Statement.

So, how does selling and expenditure activity affect the position of assets, liabilities, and equity in the Balance Sheet?

To answer this, firstly, you must know the link between the Income Statement and the Balance Sheet.

Let’s move to the next section.

 

The Link Between Income Statements and Balance Sheet

A confession. During my first year in the university, I struggled in grasping the debit and credit procedure.

The cause?

I didn’t know the link between income statements and balance sheet. I didn’t aware that a change in the Revenues and Expenses affects the Retained Earning which is part of the Equity of the Balance Sheet. I guess I didn’t pay enough attention when the class discussed this point.

In case you missed that too, here is the link between the Income Statements and Balance Sheet:

# 1. Any changes in ‘Revenue’ and ‘Expenses’ ALWAYS changes ‘Net Income.’ This then changes ‘Retained Earning’ which is a sub-account of the ‘Equity’ of the Balance Sheet.

# 2. The change in the ‘Equity’ is always balanced by either a change in ‘Asset’ or a change in ‘Liability’ or both (see the basic equation on the previous section.)

The following illustration may help:

Link of Income Statements and Balance Sheet

Using this understanding, you can expand the previous basic equation into an expanded version that capable of accommodating all types of transactions.

Let’s try.

 

The Expanded Accounting Equation

Using the linkage illustration above, follow these steps:

Step-1. Recall the basic equation:

Assets (A) = Liabilities (L) + Equity (Eq)

Step-2. Have a look at the “Equity” section of the balance sheet. What did you find? This:

Equity (Eq) = Contributed Capital (Cc) + Retained Earning (Re)

Step-3. Replace the “Equity (Eq)” on the basic equation (step-1) with “Contributed Capital (Cc) + Retained Earning (Re)”. What did you get? This:

Assets (A) = Liabilities (L) + Contributed Capital (CC) + Retained Earnings (Re)

Step-4. Have a look at the Retained Earnings Statement. What did you find? This:

Retained Earning (Re) = Net Income (Ni) – Dividends (D)

Step-5. Replace the “Retained Earning (Re) on step-3 with “Net Income (Ni) – Dividends (D).” What did you get? This:

Assets (A) = Liabilities (L) + Contributed Capital (CC) + Net Income (Ni) – Dividends (D)

Step-6. Have a look at the Income Statements. What did you find? This:

Net Income (Ni) = Revenues (R) – Expenses (E)

Step-7. Replace the “Net Income (Ni)” on step-5 with “Revenue (R) – Expenses (E).” What did you get? This:

Assets (A) = Liabilities (L) + Contributed Capital (CC) + Revenues (R) – Expenses (E) – Dividends (D)

Therefore, the expanded accounting equation is:

A = L + Cc + R – E – D

Here are terms used in this section:

  • Cc = Contributed Capital or Common Stocks for a corporation (the capital that is invested by the business’s owners)
  • Re = Retained Earning (a certain amount of earnings of a business that have been retained in the business)
  • Ni = Net Income or Profit/Loss (the company’s accomplishments in relation to its efforts during a particular period of time)
  • D = Dividends (a portion of earnings that have been distributed to owners)
  • R = Revenues (a certain amount of assets created through business operations)
  • E = Expenses (the cost incurred in normal business operations to generate revenues.)

Next, let’s see how you use this expanded version in the real world by constructing some case examples

Examples: (still using the ABC Company, a flower shop) 

(a) Revenue Increase: ABC Company sold 50 flowers in cash to an Interior Designer @$75. So it made $3750 Revenues in cash (=50x$75). What is the equation? This:

A = L + Cc + R – E – D

$3750 (cash asset) = 0 (no effect) +0 (no effect) + 3750 (sales revenues) – 0 (no effect) – 0 (no effect)

$3750 (cash asset) = 3750 (sale revenues)

So, in this case, the increase in revenue on the right side is balanced by an increase in cash asset on the left side; both sides are balanced.

But, what happened to the balance sheet as revenue isn’t a balance sheet’s element? I meant, how the balance sheet stay balanced?” you probably wonder

Remember the followings:

Firstly:

Net Income (Ni) = Revenue (R) – Expenses (E)

Net Income (Ni) = $3750 – $0 = $3750

Next:

Retained Earning (Re) = Net Income (Ni) – Dividend (D)

Retained Earning (Re) = $3750 – $0 = $3750

Finally:

Equity (Eq) = Contributed Capital (Cc) + Retained Earning (Re)

Equity (Eq) = $0 + 3750 = $3750

If we recall the basic equation a.k.a the balance sheet equation, it will become:

Assets (A) = Liability (L) + Equity (Eq)

$3750 (cash asset) = $0 (no effect) + $3750 (retained earning in equity)

$3750 (cash asset) =  $3750 (retained earning equity)

What does this mean?

An increase in ‘Revenues’ essentially increases ‘Retained Earning’ which then finally increases ‘Equity’ on the Balance Sheet.

So, in this case, cash asset increase $3750 on the left side was balanced by equity increase $3750 on the right side. Both sides are balanced.

(b) Revenue Increase: ABC Company sold 50 flowers in credit to a Weeding Organizer @85. So it made $4250 Revenues in credit (=50x$85.) What is the equation:

A = L + Cc + R – E – D

$4250 (Accounts Receivable asset) = $0 (no effect) + $0 (no effect) + $4250 (Sales Revenues) – $0 (no effect) – $0 (no effect)

$4250 (Accounts Receivable asset) =  $4250 (Sale Revenues.)

And remember, an increase in ‘Revenues’ increases ‘Net Income’ hence ‘Retained Earning’ hence ‘Equity’ (see the linkage.)

(c) Revenue Decrease: The Interior Designer returned 3 flowers for damages upon receipt. So ABC returned $750 in cash to the customers (=10x$75). It means that ABC’s revenues decrease $750 which was balanced by a decrease in cash asset also $750. And the equation:

A = L + Cc + R – E – D

-$750 (cash asset) = $0 (no effect) + $0 (no effect) – $750 (sales revenues) – $0 (no effect) – $0 (no effect)

-$750 (cash asset) = – $750 (sales revenues)

And, a decrease in ‘Revenues’ decreases ‘Net Income’ hence ‘Retained Earning’ hence the ‘Equity.’

(d) Revenue Decrease: The Wedding Organizer also returned 15 flowers because they’re delivered in the withered condition. So ABC deducted its Accounts Receivables by $1275. It means that ABC’s revenues decrease $1275 which was balanced by a decrease in accounts receivable asset also $1275. So what is the equation? This:

A = L + Cc + R – E – D

-$1275 (Accounts Receivable asset) = $0 (no effect) + $0 (no effect) -$1275 (sales revenues) – $0 (no effect) – $0 (no effect)

-$1275 (Accounts Receivable asset) = -$1275 (sales revenues)

And, a decrease in ‘Revenues’ decreases ‘Net Income’ hence ‘Retained Earning’ hence the ‘Equity.’

(e) Customer’s Deposit: The Interior Designer wanted to buy another 25 flowers. But ABC Company has sold its inventory out. So, instead, the designer placed an order for $1875 (=$25×75) with 50% deposit in cash, the balance will be paid upon the delivery.  Therefore, the ABC Company received $937.50 customer’s deposit in cash.

Note here that customer’s deposit is not a revenue (or has not become a revenue yet.) The revenue recognition principle dictates the company to record revenues only when it is completely earned and measurable.

In this example, the ABC company has not earned the revenue as it hasn’t delivered the flowers yet. Moreover, it also hasn’t known the exact number of flowers that were ready for deliverance. It means the revenue hasn’t been measurable yet.

Therefore, instead, ABC Company recognized it as a ‘customer’s deposit’ which is a liability.  So the equation is:

Assets (A) = Liability (L) + Equity (Eq)

$937.50 (cash asset) = $937.50 (customer’s deposit liability) + $0 (no effect)

$937.50 (cash asset) = $937.50 (customer’s deposit liability)

(f) Expenses Increase: ABC Company received an invoice from a Courier Company that delivered the flowers to customers for $35 with a credit term. So, in this case, a shipping expense was incurred, means an increase in expenses. So the equation is:

A = L + Cc + R – E – D

$0 (no effect) = $35 (liability) + $0 (no effect) + $0 (no effect) – $35 (shipping expense) – $0 (no effect)

$0 (no effect) = $35 (liability) – $35 (shipping expense)

$0 = $0  (the equation is balanced!)

“What happened to the balance sheet?” you may ask.

Remember, an increase in ‘Revenues’ will increase ‘Net Income’ hence ‘Retained Earning’ hence ‘Equity.’

In contrary, an increase in ‘Expenses’ will decrease ‘Net Income’ hence ‘Retained Earning’ hence ‘Equity.’

So, here what happened to the balance sheet: a $35 increase in ‘Liability’ was balanced by a $35 decreased in ‘Equity.’

(h) Expenses increase: ABC Company charged the cost of 50 flowers sold

Putting all transactions into a spreadsheet, here what you get:

Expanded Equation Example

Have a look at the “Total” on the bottom of the spreadsheet. It shows the followings:

  • the ‘Asset’ =  $6912.50 (on the left side)
  • the ‘Liabilities’ = $972.5 (on the right side)
  • the ‘Revenues’ = $5975 (on the right side)
  • the ‘Expense’ = -$35 (on the right side)

Asset = Liabilities + Revenues – Expenses

$6912.50 = $972.50 + $5975 – $35

$6912.50 = $6912.50

Left and right sides are balanced!

FYI: Manufacturing and trading companies charge Cost of Goods Sold (COGS) to any sales revenues they make. This is the cost of making the products for manufacturers OR cost of getting the inventory (for traders.)  In this example, the COGS is the purchase cost of the flower which was @$25. On the first side, the COGS reduces the Net Income, on the other side it reduce the company’s inventory (asset.) But for the sake of making it easier, I didn’t include this in the example.  I will discuss COGS later on a separate topic.

 

So, what have you learned from the case example?

Four things:

#1. There are links between the ‘Income Statements’ and ‘Balance Sheet.’

#2. The ‘Retained Earnings Statement’ act as a bridge in between the ‘Income Statements’ and ‘Balance Sheet.’

# 3. Any changes in ‘Revenue’ and ‘Expenses’ ALWAYS changes ‘Net Income.’ This then changes ‘Retained Earning’ which is a sub-account of the ‘Equity’ of the Balance Sheet.

# 4. The change in the ‘Equity’ is always balanced by either a change in ‘Asset’ or a change in ‘Liability’ or both (see the basic equation on the previous section.)

Remember:

Expanded Equation

 

Executive Summary

Indeed, there is no shortcut to master accounting. You’ve seen it yourself, even to learn the basic logic of accounting can be complicated. Especially if no one tells you how to interpret the equation. Here are some pointers:

#1. Memorize the equation

#2. Understand the logic behind the accounting equation. This will make it easier for you to memorize. But, first, you must know the elements of the financial statements. And how one element is connected to other elements.

#3. The balance sheet, for example, consists of Assets, Liabilities, and Equity. Assets are equal to Liabilities plus Equity.

#4. While Income Statement consists of Revenue, Expense, and Net Income. Net Income equal to Revenue minus Expense. Net Income then affects the value of Retained Earnings which is a sub-account of the Equity of the Balance Sheet.

#5. Also, you must know the application of the equations. When and how to apply it in the real world. When the basic equations are used, when the expanded versions are used, and how to use them.

#6. Take a look at the applied examples I’ve given. Get used to the case. Once you feel confident, you can find other cases yourself. Try to use any transactions that you see in everyday life, and solve them yourself.

#7. Keep practicing until you completely master the accounting equation. It helps to ease your way to mastering other mechanical aspects of accounting, such as debit-credit procedures.

#8. If you find any difficulties or confusions, ask the professor if you are a student. Or ask the senior if you are an entry-level staff. And, as a last resort, you can always raise a question here by writing a comment in the comment form at the end of this page.

The technical aspects of accounting are, indeed, quite complicated. This is why accounting is not for everyone. But accounting is not so difficult either. Especially for those who see complexity as an excitement. Are you one of them?

Oh, before I forget, here is a mental exercise technique you can follow to memorize the accounting equation.

How To Memorize The Accounting Equation (a Mental Exercise)

Below is a picture of a balance which represents a balance sheet. Please spend some minutes to observe every single thing on it (including words.)

Balance

Have you finished? Great. Next, do the following steps:

Step-1. Mindfully observe the balance image above. And say the followings, in your mind, while observing:

This is a balance sheet.

The assets are on the left side.

The liability+equity are on the right side.

Both must be balanced.

Step-2. Repeat the sentence and try to keep observing the object as long as you can, without blinking.

Step-3. Stop when your eyes get dry and blinked.

Step-4. Close your eyes and try to visualize the above image in your mind while saying the sentence.

Step-5. Can you completely remember the image? If you can’t, back to the step #1 and #2 above. Repeat it until you can memorize every single detail of the image without a miss.

Step-6. Draw the object on a whiteboard or piece of paper as quick as possible without having a look at the original image.

Step-7. Compare the drawn image with the original. Are they the same? If something missed, try again from the beginning. Repeat it until nothing is missing.

Step-8. Do step #3 and #4 above while closing your eyes!

Step-9. Do the same for every single image on this guide (but without the sentence on step-1.)

That probably sound silly or even crazy. But, what you’ve done was actually carving the concept into your subconscious mind. Once you’re done it then becomes the part of your basic instinct. This basic instinct will float on the surface every time you’re dealing with a complex accounting case.

Be extremely good in the debit-credit procedures and having a good grasp on accounting equation is the only key for that purpose.

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