Accounting equation
Accounting equation - Wikipedia
In a corporation, capital represents the stockholders' equity. Since every business transaction affects at least two of a company's accounts, the accounting equation will always be "in balance", meaning the left side of its balance sheet should always equal the right side. Thus, the accounting formula essentially shows that what the firm owns (its assets) is purchased by either what it owes (its liabilities) or by what its owners invest (its shareholders' equity or capital); note that the profits earned by the company, is ultimately owned by its owners.
The formula can be rewritten:
- Assets - Liabilities = (Shareholders' or Owners' Equity)
This equation is part of the transaction analysis model, for which we also write
- Owner's equity = Contributed Capital + Retained Earnings
- Retained Earnings = Net Income − Dividends
and
- Net Income = Income − Expenses
The equation resulting from making these substitutions in the accounting equation may be referred to as the expanded accounting equation, because it yields the breakdown of the equity component of the equation.
- Assets = Liabilities + Contributed Capital + Revenue - Expenses - Dividends
資産 = 負債 + 持分
資産 = 株主資本 + 負債
資産 - 負債 = 株主持分／所有者持分
所有者持分 = 拠出資本 + 内部留保
当期純利益 = 収益 - 費用
資産 = 負債 + 拠出資本 + 収益 - 費用 - 配当
貸借平均の原理（たいしゃくへいきんのげんり）とは、複式簿記において、仕訳帳や総勘定元帳などの借方の合計と貸方の合計が常に一致するという原理である。
- 資産 + 費用 = 負債 + 純資産 + 収益
という等式を根拠としている。
Double-entry bookkeeping - Wikipedia
This approach is also called the American approach. Under this approach transactions are recorded based on the accounting equation, i.e., Assets = Liabilities + Capital. The accounting equation is a statement of equality between the debits and the credits. The rules of debit and credit depend on the nature of an account. For the purpose of the accounting equation approach, all the accounts are classified into the following five types: assets, capital, liabilities, revenues/incomes, or expenses/losses.
If there is an increase or decrease in a set of accounts, there will be equal decrease or increase in another set of accounts. Accordingly, the following rules of debit and credit hold for the various categories of accounts:
- Assets Accounts: debit entry represents an increase in assets and a credit entry represents a decrease in assets.
- Capital Account: credit entry represents an increase in capital and a debit entry represents a decrease in capital.
- Liabilities Accounts: credit entry represents an increase in liabilities and a debit entry represents a decrease in liabilities.
- Revenues or Incomes Accounts: credit entry represents an increase in incomes and gains, and debit entry represents a decrease in incomes and gains.
- Expenses or Losses Accounts: debit entry represents an increase in expenses and losses, and credit entry represents a decrease in expenses and losses.
These five rules help learning about accounting entries and also are comparable with traditional (British) accounting rules.
Double-entry bookkeeping is governed by the accounting equation. If revenue equals expenses, the following (basic) equation must be true:
- assets = liabilities + equity
For the accounts to remain in balance, a change in one account must be matched with a change in another account. These changes are made by debits and credits to the accounts. Note that the usage of these terms in accounting is not identical to their everyday usage. Whether one uses a debit or credit to increase or decrease an account depends on the normal balanceof the account. Assets, Expenses, and Drawings accounts (on the left side of the equation) have a normal balance of debit. Liability, Revenue, and Capital accounts (on the right side of the equation) have a normal balance of credit. On a general ledger, debits are recorded on the left side and credits on the right side for each account. Since the accounts must always balance, for each transaction there will be a debit made to one or several accounts and a credit made to one or several accounts. The sum of all debits made in each day's transactions must equal the sum of all credits in those transactions. After a series of transactions, therefore, the sum of all the accounts with a debit balance will equal the sum of all the accounts with a credit balance.
Debits and credits are numbers recorded as follows:
- Debits are recorded on the left side of a ledger account, a.k.a. T account. Debits increase balances in asset accounts and expense accounts and decrease balances in liability accounts, revenue accounts, and capital accounts.
- Credits are recorded on the right side of a T account in a ledger. Credits increase balances in liability accounts, revenue accounts, and capital accounts, and decrease balances in asset accounts and expense accounts.
- Debit accounts are asset and expense accounts that usually have debit balances, i.e. the total debits usually exceed the total credits in each debit account.
- Credit accounts are revenue (income, gains) accounts and liability accounts that usually have credit balances.
The mnemonic DEADCLIC is used to help remember the effect of debit or credit transactions on the relevant accounts. DEAD: Debit to increase Expense, Asset and Drawing accounts and CLIC: Credit to increase Liability, Income and Capital accounts.
A second popular mnemonic is DEA-LER, where DEA represents Dividend,Expenses,Assets for Debit increases, and Liabilities,Equity,Revenue for Credit increases.
The account types are related as follows:
current equity = sum of equity changes across time (increases on the left side are debits, and increases on the right side are credits, and vice versa for decreases)
current equity = Assets – Liabilities
sum of equity changes across time = owner's investment (Capital above) + Revenues – Expenses
