What are the components of the accounting equation?



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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