Accounting Equation

The Accounting Equation represents the relationship between the assets, liabilities, and the capital of a business.  This is a foundational equation in accounting which determines total assets, the bottom line metric for financial stability.

APPLICATIONS

The Accounting Equation is the foundation for a double-entry bookkeeping system. In this approach transactions are recorded based on the accounting equation, which is a statement of equality between the company's debits and the credits. In this approach, all accounts are classified into the following five types: assets, liabilities, income/revenues, expenses, or capital gains/losses.  These five types of accounts are then combined into either liabilities or assets, thus feeding more detailed information into the Accounting Equation.

In double-entry bookkeeping, when there is an increase or decrease in one account, there will be corresponding equal decrease or increase in another account. The rules summarizing the relationships between the five types of accounts are:

1. Assets Accounts - a debit transaction increases assets and a credit transaction decreases assets
2. Capital Account -  a credit transaction increases capital and a debit transaction decreases capital
3. Liabilities Accounts: a credit transaction increases liabilities and a debit transaction decreases liabilities
4. Revenues or Incomes Accounts: a credit transaction increases incomes and gains, and a debit transaction decreases incomes and gains
5. Expenses or Losses Accounts: a debit transaction increases expenses and losses, and a credit transaction decreases expenses and losses

REFERENCE

[1] Accounting Equation
Source: Wikipedia
URL: http://en.wikipedia.org/wiki/Accounting_equation
 License: CC Attribution-ShareAlike 4.0 International 

[2] Double-entry bookkeeping system
Source: Wikipedia
URL:
 License: CC Attribution-ShareAlike 4.0 International