2. Accounting Equation

By understanding the definition of an asset, liability, equity, income, and expenses and classifying the financial data correctly, one can put together these elements to form the following equation.

A(Asset) = L(Liability) + E(Equity)

By expanding the equation further, we can rewrite it as follows:

A(Asset) = L(Liability) + [E(Equity) + I(Income) – E(Expense)]

In a “T accounting format,” they will appear as follows:

Cash Flow Chart

This means that the left-hand side (Assets) will always be equal to the right-hand side (Liabilities + Equities) by default.


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