Accounting equation shows that the total assets should be equal to the total liabilities and
stockholders’ equity.
The left side of accounting equation represents the resources of an entity.
The right side of accounting equation shows who has claims to the resources.
[Equation 1] Assets = Liabilities + Equity
As an extension to the basic accounting equation, revenues and expenses can be added.
Revenues increase the owners’ equity and expenses decrease the owners’ equity.
[Equation 2] Assets = Liabilities + Equity + Revenues – Expenses
By adding expenses to both sides, the equation 2 can be rearranged to the equation 3 as
follows:
[Equation 3] Assets + Expenses = Liabilities + Equity + Revenues
The equation 2 shows that assets and expenses are on the left side of the equation. Liabilities,
equity and revenues are on the right side of the equation.
Review Questions
1. Entity A had the following balances of assets and liabilities at December 31, 20×1.
Asset =
100
,
000
L
i
a
b
i
l
i
t
i
e
s
=
100,000Liabilities=60,000
What is the amount of stockholders’ equity at December 31, 20×1?
Assets = Liabilities + Stockholders’ Equity
100
,
000
=
100,000=60,000 + Stockholders’ Equity
Stockholders’ Equity =
100
,
000
–
100,000–60,000 = $40,000