The accounting equation and why the balance always balances

Question

The accounting equation and why the balance always balances

In: 2

Answer 1

Let’s use an example transaction. You sell an item for cash.

You get cash, which is an Asset account, and its balancing entry is an increase in revenue, which is in Owner’s Equity.

In addition, you have given up Invenfory (which is also an Asset account), and this is balanced by recognizing an expense in Owner’s Equity (ie Cost of Goods Sold).

This example has changes on one side affecting the other side. You can also have entries that don’t cross the equals sign. For example, if you buy inventory with cash, your cash Asset decreases but your inventory Asset increases. Or if you expect a future liability but you don’t pay out cash yet for it, the increase in Liability will decrease Owner Equity (by decreasing net income by increasing expense as recognized on the P&L).