The accounting equation.
Bookkeeping and accountancy are both used as a financial system for all businesses to record their transactions, however there are a few differences between the two.
Bookkeeping is when someone records the transactions of a business for example goods and services which have been purchased and paying expenses. Whereas accounting is when the book-keeping records are being used for some purpose, for example comparing business activity from one period to another. Accounting involves analysing and interpreting data, bookkeeping does not involve this.
The accounting equation forms the basis for all accounting systems. This straightforward accounting equation shows two things about a company; what it owes and what it owns.
For example, if someone starts up a business selling new and old car parts they will need resources. If the owner of the business supplies all of the resources (car parts) this can be shown as:
Resources in the business = Resources supplied by the owner
- The resources supplied by the owner are called ‘Capital’
- The actual resources that are then in the business are called ‘Assets’
This means that when the owner has supplied all of the resources, the accounting equation can be shown as:
Assets = Capital
Usually, however, someone other than the owner has supplied some of the assets.
The amount owing to this person for these assets is given the name ‘liabilities’.
The equation has now changed to:
Assets = Capital + Liabilities