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The basic accounting equation is the foundation for the double-entry bookkeeping system. It shows how assets were financed either by borrowing money from someone else (liability) or by paying your own money (shareholder's equity). For example, say a student buys a computer for $945. This student borrowed $500 from his best friend and saved another $445 from his part-time job. Now his assets are worth $945, liabilities are $500, and equity $445. The formula can be re-written Also the equation can be re-written as Assets= Liabilities + Owners Equity(Revenue - Expenses). This is often referred to as the expanded accounting equation because it yields the breakdown of the equity component of the equation. [3] This expanded equation is useful for conducting transaction analysis a process whereby business transactions are analyzed using the accounting equation.
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