You are here

The Accounting Equation

5 August, 2015 - 16:21

\begin{align*} A&=Assets\\ L&=Liabilities\\ F&=Owners'\ Funds\\ C&=Capital\\ D&=Drawings\\ P&=Profit\\ \end{align*}

The Value of the business is the value of its assets less the value of its liabilities and this value belongs to the owners of the business:


The Owners fund must also equal the amount the owners have put into the business (Capital) less any amounts they have taken out (Drawings) plus any profit. For the time being we assume the business is profitable.


We add D + L to both sides to remove the minus signs. A + D = C + P + L

We call items on the left hand side Debits and items on the right hand side Credits. Then:

Total\ Debits = Total\ Credits

In order that this equation holds we must also ensure that a loss is on the opposite side to a profit and therefore a loss is a debit.

Note that items of income increase profit so they are also credits, while expenses decrease profit and are therefore debits.