The Accounting Equation

The statement of financial position [i.e. balance sheet] reflects what is widely known as ‘the accounting equation‘.

The accounting equation states that, for an entity, its total assets of a business minus its total liabilities will equal its equity or capital
i.e. A – L = E.

This concept is essentially quite simple. If someone purchases a building costing £400,000 partly financed by a £320,000 mortgage, the owner’s equity in the building is £80,000. Equity is sometimes called capital. All statements of financial position will analyse and show totals for assets, liabilities and capital.

Like any equation, the accounting equation can be rearranged, for example:

• Assets = Liabilities + Equity
• Non current assets + Current Assets = Non current liabilities + Current Liabilities + Equity
• and so on

Follow the link below to access an elearning resource which will take you through the accounting equation and the elements of accounting.

Link to learning materials (elearning resource on the accounting equation).

There is addtional reference material on the International Accounting Standards Board website at https://www.iasplus.com/en-gb/standards/other/framework – scroll down to the section on ‘The elements of financial statements’. This is authoritative material.

CLASS EXERCISE

Ward Hadaway publishes an annual list of the top 50 companies in the North East based on growth. IFor 2023 the list was headed by RE:GEN North East Limited.

Things to do:

Task 1: What does the company do?

Task 2: Find its website and explore … Does the company publish its financial results on its website? Hint: it doesn’t … why do you think that is so?

Task 3: Locate the company’s record at Companies House. Explore the legal information available about the company.

Task 4: Explore the latest filed financial statements. Locate the balance sheet (statement of financial position) and explore how the statement reflects the accounting equation.

Task 5: Fastest growing? Locate some measures of size, which are the best?

Directed Private Study

• Start preparing for your first seminar session: see separate post. The seminar tasks are concerned with helping you deepen your understanding of the material covered in Lecture Two.
• Remember the purposes of the seminar sessions is to help you with any problems you are having with the lecture and directed private study sessions.