Principles of Accounting

Basic Accounting Equation

For each account type, an increase is recorded as a debit or credit as follows:

Extended Accounting Equation

Derived progressively:

• $\text{Assets} = \text{Capital}$
  The owner’s capital is what funds the entity’s assets.
• $\text{Assets} = \text{Capital} + \text{Liability}$
  Assets can also be funded by external obligations, not just capital.
• $\text{Assets} = \text{Capital} + \text{Profit} + \text{Liability}$
  Profit earned by the entity adds to the capital funding its assets.
• $\text{Assets} = \text{Capital} + (\text{Income} - \text{Expenses}) + \text{Liability}$
  Profit is expanded into its components: income earned less expenses incurred.
• $\text{Assets} + \text{Expenses} = \text{Capital} + \text{Income} + \text{Liability}$
  Expenses are moved to the left side, giving the extended accounting equation.