THE ACCOUNTING EQUATION
ASSETS = LIABILITIES + EQUITY
This equation can be expanded even further to:
ASSETS + EXPENSES = LIABILITY + EQUITY + INCOME
which are:
DEBITS = CREDITS
Debits are recorded on the left hand side of the equation (ledger) and Credits are recorded on the right hand side.
Some typical examples:
INCOME TRANSACTIONS
Cash @ Bank
A + E = L + EQ + I
| 15/7/09 | Sales | $110 | |||
Cash Sales
A + E = L + EQ + I
| 15/7/09 | Bank | $100 | |||
GST Collected
A + E = L + EQ + I
| 15/7/09 | Bank | $10 | |||
EXPENSE TRANSACTIONS
Wages
A + E = L + EQ + I
| 15/7/09 | Bank | $900 | |||
Cash @ Bank
A + E = L + EQ + I
| 15/7/09 | Bank | $900 | |||
This is called a double entry system. These equations apply when ever we are INCREASING the amount in these type of accounts.
You will notice that in the Income transaction examples, there are three transactions. One on the left hand side and two on the right hand side which when added up EQUALS the one on the left hand side.
The money is going into the Bank (therefore increasing our asset) so$110 is recorded on the left. Where this money is allocated to, goes on the right side, $100 was sales (Income) and $10 was GST (Liability). These accounts have all now been increased by these amounts.
The same applies to the Expenses examples. In this case, we have paid wages.
Wages is an expense and is recorded on the left side. Cash at Bank is an asset (which is also on the left side, but this time our asset isn’t being increased, money is going out of the account decreasing it, so it has to be recorded on the right hand side.
