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The accounting equation
Contents
Key to resources
2
Introduction
3
Summary
4
This learning guide is based on the following resource:
Textbook
Duncan A (2006) Introductory Accounting, National Core Accounting Publications, Bondi
The accounting equation
© DET NSW 2006 2006/052/12/2006 LRR4668
1
Key to resources
Resource
Textbook
1
Chapter 2, The Accounting Equation, section 2.1
2
Chapter 2
 self-testing exercises 1 and 2
 end of chapter exercises 3 and 4
2
The accounting equation
© DET NSW 2006 2006/053/12/2006 LRR4668
Introduction
The process of recording the transactions of a business has the following
steps:
1
Enter the transactions from the relevant documents, either manually or
computerised, into appropriate journals (books of first entry).
2
Classify the transactions by entry from the journal(s) into appropriate
ledger accounts (records of second entry).
Underlying these recording and classifying phases is the universally used
double-entry system of bookkeeping. This system is based on a two-sided
nature of transactions represented by debit and credit entries of equal value
to accounts relevant to the transaction.
Note: In this vein, our day-to-day experiences of accounting and the use of
accounts on a debit and credit basis is commonly associated with our bank
accounts or credit-card accounts, with their debit and credit entries and debit
and credit balances.
Traditionally, a debit entry is an entry on the left-hand side of an account
and a credit entry is an entry on the right-hand side of an account. A greater
value of debit entries will result in an account having a debit balance; a
greater value of credit entries will result in a credit balance.
Later in the course of your studies you will be introduced to the practical
applications of the double-entry system.
The two-sided processes of the double-entry system stem from the
acceptance of the accounting equation: assets = equities (A = E), where
assets are things of value belonging to the business and equities are the
financial interests that persons—the owner and creditors—have in the
business.
During the course of your studies you will be taken through the accounting
equation from the initial commencing capital contribution by the owner
through a series of transactions covering the incurrence of liabilities and the
acquisition of assets.
Now go to Resource 1
The accounting equation
© DET NSW 2006 2006/052/12/2006 LRR4668
3
Now go to Resource 2
Summary
This learning guide introduces you to the double-entry system of
bookkeeping. This system is based on the two-sided nature of transactions
represented by debit and credit entries of equal value to accounts relevant to
the transaction. The two-sided processes of the double-entry system are
based on the acceptance of the accounting equation of assets = equities
(A = E).
4
The accounting equation
© DET NSW 2006 2006/053/12/2006 LRR4668