Accounting Equation

(noun)

The "basic accounting equation" is the foundation for the double-entry bookkeeping system. For each transaction, the total debits equal the total credits.

Related Terms

Examples of Accounting Equation in the following topics:

  • The Accounting Equation

    • The accounting equation is a general rule used in business transactions where the sum of liabilities and owners' equity equals assets.
    • A company with $30,000 in liabilities and $10,000 in owners' equity would have $40,000 in assets according to the accounting equation.
    • Looking at the fundamental accounting equation, one can see how the equation stays is balance.
    • Additionally, changes is the accounting equation may occur on the same side of the equation.
    • Likewise, as the company receives payment from its customers, accounts receivable is credited and cash is debited.

  • Fundamental Accounting Equation

    • The fundamental accounting equation can actually be expressed in two different ways.
    • A mark in the credit column will increase a company's liability, income and capital accounts, but decrease its asset and expense accounts.
    • A mark in the debit column will increase a company's asset and expense accounts, but decrease its liability, income and capital account.
    • He borrows $500 from his best friend and pays for the rest using cash in his bank account.

  • Double-Entry Bookkeeping

    • The rules for formulating accounting entries are known as "Golden Rules of Accounting".
    • The accounting entries are recorded in the "Books of Accounts".
    • They are the Traditional Approach and the Accounting Equation Approach.
    • Following this approach, accounts are classified as real, personal, or nominal accounts.
    • Real accounts are assets.

  • Changes in the Monetary Base

    • First, we list the Fed's total assets in Equation 2 and total liabilities in Equation 3.
    • After substituting the monetary base into Equation 3, we yield Equation 4.
    • Subsequently, we use the accounting identity as defined by Equation 5 to relate the Fed's assets, liabilities, and capital.
    • Finally, we substitute the total assets and total liabilities into the accounting identity, and we solve for the monetary base, which becomes Equation 6:
    • Equation 6 shows how a change in the Fed's balance sheet affects the monetary base.

  • Compounding Frequency

    • Banks and finance companies usually calculate interest payments and deposits monthly.Thus, we adjust the present value formula for different time units.If you refer to Equation 11, we add a new variable, m, the compounding frequency while APR is the interest rate in annual terms.In the monthly case, m equals 12 because a year has 12 months.
    • For example, you deposit $10 in your bank account for 20 years that earns 8% interest (APR), compounded monthly.Consequently, we calculate your savings grow into $49.27 in Equation 12: If your bank compounded your account annually, then you would have $46.61.
    • We can convert any compounding frequency into an APR equivalent interest rate, called the effective annual rate (EFF).From the previous example, we convert the 8% APR interest rate, compounded monthly into an annual rate without compounding, yielding 8.3%.We show the calculation in Equation 13.The EFF is the standard compounding formula removing the years and the present value terms.
    • If you deposited $10 in your bank account for 20 years that earn 8.3% APR with no compounding (or m equals 1), then your savings would grow into $49.27, which is the identical to an interest rate of 8% that is compounded monthly.We calculate this in Equation 14.
    • For example, you deposit $50 into your bank and leave it alone for 70 years.If the bank uses continuous compounding, then your savings grow into $9,528.31, calculated in Equation 17: Every fraction of a second over 70 years, you earn interest on your account.On the other hand, if your bank uses monthly compounding, subsequently, your savings would grow into$9,373.90, yielding $154.41 less than the standard compounding.

  • Multiple Deposit Expansion and Contraction

    • Money supply expanded by $19,000 because you have $10,000 sitting in your account, and the car dealership has $9,000 in his account.
    • Money supply has expanded by $27,100, which includes the $10,000 in your account, $9,000 in the car dealer's account, and $8,100 in the construction company's account.
    • When a bank accepts a new checking account, the bank must hold a percentage of the deposit, which is Equation 2.
    • We substitute Equation 2 into Equation 1 and set the excess reserves equal to zero, which yields Equation 3.
    • We show reserve changes in Equation 4 and deposit changes in Equation 5.

  • International Fisher Effect

    • We derive the International Fisher Effect with Equation 17.
    • Domestic return is the interest rate earned by a $1 investment in a foreign bank account after T days of maturity converted into the domestic country's currency.
    • We calculated his return on his home bank deposit in Equation 18.
    • First, we solve Equation 17 for rd.
    • Hence, Equations 20 and 21 are long-run equilibrium equations.

  • The Drake Equation

  • Multiple Investments

    • For instance, you deposit $500 into the bank account every year at 6% interest.
    • You added another $500 to your account at the end of the year.
    • We calculate the future value of your bank deposits in Equation 8.
    • We calculate the present value of $1,836.51 in Equation 9.
    • We calculated the present value in Equation 10.

  • Application of Bernoulli's Equation: Pressure and Speed

    • If changes there are significant changes in height or if the fluid density is high, the change in potential energy should not be ignored and can be accounted for with,