2006 Moose International
The Accounting Equation
QuickBooks Pro is a double-entry accounting system. This ensures that your books are always
in balance, and is dictated by generally accepted accounting principles. The double-entry
system is exemplified in the basic accounting equation:
Assets = Liabilities + Equity
Although you will not work directly with the accounting equation when you use QuickBooks Pro,
a basic grasp of the equation is necessary to understand other accounting principles.
The accounting equation states that total assets equal the amounts claimed by creditors,
owners, and shareholders. In other words, what an organization has (assets) is either owned
by creditors (liabilities) or by investors (equity).
Earnings (profits) are reflected in the equity part of the equation. Earnings can be defined as
the difference between income and expenses. Without changing the validity of the accounting
equation, we can revise it to:
Assets = Liabilities + Income – Expenses + Equity
If proper accounting procedures are followed, the accounting equation will hold true before and
after you record each financial transaction. However, if it were necessary to go to all the trouble
to prepare the accounting equation after recording each financial transaction, few transactions
would ever take place. Accounts (asset, liability, equity, income, and expense) were devised as
an efficient means to record financial transactions.
The following table may help you remember to normal types of transactions and usual account
balances for each type of account.
Type of Account Increase with a: Decrease with a: Normal Balance is a:
Asset Debit Credit Debit
Liability Credit Debit Credit
Equity Credit Debit Credit
Income Credit Debit Credit
Expense Debit Credit Debit
