The accounting equation is assets = liabilities + equity. Every transaction changes at least two items, and after each one the two sides must still be equal.
This lesson is part of SPM Accounting foundations. It uses the labels from assets, liabilities, equity, income and expenses.
How do you track a transaction?
Write the equation with current figures. For each transaction, ask which items change and in which direction, then update both sides.
If assets rise, either another asset falls, a liability rises, or equity rises. The equation never allows a change on one side only.
Worked example: six transactions
Start from nothing. After each step, the figures are shown as assets = liabilities + equity.
| Step | Transaction | Assets | Liabilities | Equity |
|---|---|---|---|---|
| 1 | Owner invests RM30 000 cash | 30 000 | 0 | 30 000 |
| 2 | Buys equipment RM8 000, cash | 30 000 | 0 | 30 000 |
| 3 | Buys inventory RM5 000 on credit | 35 000 | 5 000 | 30 000 |
| 4 | Pays rent RM1 200 cash | 33 800 | 5 000 | 28 800 |
| 5 | Pays supplier RM2 000 cash | 31 800 | 3 000 | 28 800 |
| 6 | Earns RM900 cash for a service | 32 700 | 3 000 | 29 700 |
In step 2 cash falls by RM8 000 and equipment rises by RM8 000, so the total stays RM30 000. In step 4 the rent is a cost, so cash falls and equity falls by the same RM1 200. In step 5 the asset cash falls and the liability falls by RM2 000.
Check the last line: 3 000 + 29 700 = 32 700, which equals the assets.
The error that breaks the equation
Suppose a student records step 4 as only a fall in cash. Assets become RM33 800, liabilities stay RM5 000 and equity stays RM30 000.
The right side is now 35 000 and the left side is 33 800, so the equation is out by RM1 200. The clue is that the gap equals the last transaction, because a payment was recorded only on one side.
The mistake that loses marks
The common slip is to treat an expense as a change in assets only. Rent, wages and electricity always reduce equity too, because they are costs of the period.
A second slip is to count a credit purchase as a fall in cash. No cash moved in step 3, so the payable, which is a liability, rises instead.
Check yourself
A business starts with RM50 000 cash from the owner. It buys a van for RM18 000 on credit, then pays electricity of RM400 in cash, then pays RM3 000 towards the van. Find assets, liabilities and equity at the end.
Answer
Start: assets 50 000 = liabilities 0 + equity 50 000.
Van on credit: assets 68 000 = liabilities 18 000 + equity 50 000.
Electricity: assets 67 600 = liabilities 18 000 + equity 49 600.
Pay RM3 000 of the van debt: assets 64 600 = liabilities 15 000 + equity 49 600.
Check: 15 000 + 49 600 = 64 600.
What to study next
Continue with identifying users and purposes of accounting information. The equation becomes debits and credits in double entry and ledgers, and you can practise the direction of each change with the debit-credit transaction trainer.
To have a teacher go through your own transaction lists, see online one-to-one Accounting tuition.