(Answered) ACC205 Week 1 – Discussion 1

The fundamental accounting equation, Assets = Liabilities + Owners’ Equity, is a cornerstone in accounting that must always hold true. This equation reflects the basic principles of double-entry bookkeeping, which ensures that every financial transaction has equal debits and credits. In essence, it states that a company’s assets must be financed by either borrowing (liabilities) or the owner’s investment (owners’ equity).

Let’s explore some sample transactions to demonstrate the validity of the accounting equation:

1. Initial Investment:
   • Transaction: The owner invests $10,000 cash to start a new business.
   • Accounting Equation: Assets (+$10,000 cash) = Liabilities ($0) + Owners’ Equity (+$10,000).
2. Borrowing from a Bank:
   • Transaction: The business takes out a $5,000 loan from a bank.
   • Accounting Equation: Assets (+$15,000 cash) = Liabilities (+$5,000 loan) + Owners’ Equity (+$10,000).
3. Purchase of Supplies on Credit:
   • Transaction: The business purchases $2,000 worth of supplies on credit.
   • Accounting Equation: Assets (+$15,000 cash + $2,000 supplies) = Liabilities (+$7,000 loan) + Owners’ Equity (+$10,000).
4. Repayment of Loan:
   • Transaction: The business repays $2,000 of the loan.
   • Accounting Equation: Assets (+$15,000 cash + $2,000 supplies) = Liabilities (+$5,000 loan) + Owners’ Equity (+$12,000).

These examples illustrate that the accounting equation remains balanced after each transaction. The total assets on one side always equal the sum of liabilities and owners’ equity on the other side. This equilibrium is a fundamental principle in accounting and is maintained to ensure accurate financial reporting and analysis.

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