Q3. Accounting equation

What are the components of the accounting equation?

A3.

(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

[Note]

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

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