What is the 'Accounting Equation'?

The equation that is the foundation of double entry accounting. The accounting equation displays that
all assets are either financed by borrowing money or paying with the money of the company's
shareholders. Thus, the accounting equation is: Assets = Liabilities + Shareholder Equity.
The balance sheet is a complex display of this equation, showing that the total assets of a company
are equal to the total of liabilities and shareholder equity.

Types of accounts
1. Asset accounts the different types of economic resources owned or controlled by an entity.
Common examples of asset accounts are cash on hand, cash in bank, real estate, inventory,
prepaid expenses, goodwill, and accounts receivable.
2. Liability accounts represent the different types of economic obligations of an entity, such as
accounts payable, bank loans, bonds payable, and accrued expenses.
3. Equity accounts represent the residual equity of an entity (the value of assets after deducting
the value of all liabilities). Equity accounts include common stock, paid-in capital, and retained
earnings. The type and captions used for equity accounts are dependent on the type of entity.
4. Revenue or income accounts represent the company's earnings and common examples
include sales, service revenue and interest income.
5. Expense accounts represent the company's expenditures. Common examples are utilities,
rents, depreciation, interest, and insurance.
6. Contra-accounts are accounts with negative balances that offset other balance sheet
accounts. Examples are accumulated depreciation (offset against fixed assets), and
the allowance for bad debts (offset against accounts receivable).

Simple Example Chart of Accounts

Balance Sheet Accounts

Class 1 Equity and long term debts

Class 2 Fixed Assets
Class 3 Stocks Accounts
Class 4 Third-Party Accounts
Class 5 Bank & Cash

Asset Accounts

Bank/Cash at Bank
Cash
Deferred Expense
Other Assets
Accounts Receivable
Supplies
Prepaid Insurance
Equipment
Accumulated Depreciation Equipment
Buildings and land assets
Inventories, Machines
Alterna
 IngDirect Savings
Tangerine chequing
Account Receivable

Liability Accounts

Notes Payable
Accounts Payable
Unearned Service Revenue
Tax Payable
Bonds Payable
Salaries and Wages Payable
Interest Payable
Loans
Short debts (payables 2440)
Income Tax Payable
VAT Payable
Wages Payable
other liabilities

Equity Accounts (for sole proprietorship and partnerships)

Owner's capital
Share Capital-Ordinary
Retained Earnings
Capital contributions
Dividends
Income Summary
Drawings (Distributions)

Equity Accounts (for corporations)

Common Stock
Capital in excess of par
Retained earnings

Profit & Loss Accounts

Class 6 Costs Accounts

Class 7 Revenues Accounts

Revenue Accounts

Rental Income
Sales Income
Interest Income
Revenue Accounts

Expense Accounts

Office Expense
Computer Expenses
 Communication Expense
Labour & Welfare Expenses
Advertising Expenses
Printing & Stationery Expenses
Supplies Expense
Depreciation Expense
Insurance Expense
Salaries and Wages Expense
Rent Expense
Utilities Expense
Interest Expense
Costs directly related to revenues
General expense Accounts
Financial Accounts
Contra-accounts

Special Accounts

Class 8 Special Accounts

Class 8 Expenses Recognised In Equity
Class 9 Income Recognised In Equity

Accounts on Debits and Credits

A DEBIT to Accounts in the five primary sections has the following effect on the account balances:

Assets (INCREASE)
Liabilities (DECREASE)
Equity (DECREASE)
Income (DECREASE)
Expenses (INCREASE)

A CREDIT to accounts in the five primary sections has the following effect on the account balances:

Assets (DECREASE)
Liabilities (INCREASE)
Equity (INCREASE)
Income (INCREASE)
Expenses (DECREASE)