IGCSE Accounting Equation
In this lesson, we will learn what the main accounting groups — assets, liabilities, equity, income, and expenses comprise. You will also learn how each of these groups work together to form the Accounting Equation and understand how different business transactions affect a company’s financial position.
Related Lessons:
Identifying Accounting Groups
Business accounts can be classified into the following five main groups:
Assets
These are resources that a business owns and use for its operation.
Examples of accounts: Trade receivables, inventory, cash, bank, machinery, equipment, fixtures & fittings, motor vehicles, premises, buildings
Liability
These are debts that a business owes.
Examples of accounts: Trade payables, loans
Capital
Comprises of assets contributed by the business owner into the business and profit earned by the business.
Drawings
Are business assets withdrawn by business owner for personal use.
Income
These are revenue earned by the business.
Examples of accounts: Sales, discount received, interest income, commission income
Expense
These are services used by the business in the course of operation.
Examples of accounts: Discount allowed, utilities, rent, salaries
Applying Accounting Equation
The accounting equation is formed by linking each account group together:
Assets = Liability + Owner’s Equity
where Owner’s equity = Capital + Profit for the year (or minus Loss for the year) – Drawings
Profit or Loss for the year = Income – Expenses
As such, the accounting equation can also be written as:
Assets = Liability + [Capital + (Income – Expenses) – Drawings]