Wize University Introduction to Financial Accounting Textbook > Transaction Analysis
The Accounting Equation
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The Accounting Equation
Financial accounting's most basic and most important rule is that assets must equal liabilities plus shareholders' equity.
Assets = Liabilities + Shareholders' Equity
- Describes who has rights to the company's assets
- Assets can be divided between credits (liabilities) and owners (equity)
- Describes how assets are purchased
- Can be purchased using debt (liabilities) or purchased by owners (equity).
Double-Entry Accounting System
- Based on the accounting equation
- Every transaction must affect at least two accounts.
- Accounting equation should always remain balanced.
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The Expanded Accounting Equation
The purpose of the expanded accounting equation is to show you how revenues, expenses and dividends are related to the overall accounting equation.
- Revenues increase retained earnings and shareholders' equity
- Expenses decrease retained earnings and shareholders' equity
- Dividends decrease retained earnings and shareholders' equity
Practice: The Accounting Equation
Select the correct answer for each of the following questions
If a transactions increases an asset by $10,000, then which of the following would keep the accounting equation in balance?
Select all that apply.