Q3. Accounting equation
What are the components of the accounting equation?
(1) The accounting equation shows that total assets should be equal to total liabilities plus owner’s equity.
[EQ 1] Assets = Liabilities + Equity
(2) By adding revenues and expenses, EQ 1 can be expanded to EQ 2. Revenues increase owner’s equity and expenses decrease owner’s equity.
[EQ 2] Assets = Liabilities + Equity + Revenues – Expenses
1. Equity = Paid-in capital + Retained earnings
2. Ending retained earnings = Beginning retained earnings + Net income
3. Net income = Revenues – Expenses
(3) By moving expenses to the left side of the equation, EQ 2 can be arranged as EQ 3.
[EQ 3] Assets + Expenses = Liabilities + Equity + Revenues