Thus far we have learnt that every business transaction must be recorded once on the debit side (left) of an account and once on the credit side (right) of an account and that total debits must equal total credits. This week we introduce the fourth and final golden rule of accounting which is the accounting equation, Assets = Capital + Liabilities. This equation needs to be in balance after every transaction.
Assets include things like: buildings, equipment and products or goods. Assets also include debts that are owed by customers and funds in the business bank account.
Liabilities include: amounts that are owed by the business to suppliers for products or services. It also includes any funds that the business has borrowed.
Capital or owner’s equity: Includes funds which the owner invests in the business as well as any profit that is retained for use in the business less any shares that are due to the owner.
Think of assets as resources used in the business and think of liabilities and capital / owner’s equity as resources supplied by creditors and owners.
If you need to refresh your memory on the 3 other rules of accounting, you can find the links below:
*Answer for yesterday’s Braai quiz:*
Throw it up in the air and it will come back down! Yup, bet you didn’t think of that one did ya!