Here are some examples of how the accounting equation remains in balance:
- An owner's investment into the company will increase the company's assets and will also increase owner's equity
- When the company borrows money from its bank, the company's assets increase and the company's liabilities increase
- When the company repays the loan, the company's assets decrease and the company's liabilities decrease
- If the company pays cash for a new delivery van, one asset (cash) will decrease and another asset (vehicles) will increase
- If a company provides a service to a client and immediately receives cash, the company's assets increase and the company's owner's equity will increase because it has earned revenue
- If the company provides a service and allows the client to pay in 30 days, the company has increased its assets (Accounts Receivable) and has also increased its owner's equity because it has earned service revenue
- If the company runs a radio advertisement and agrees to pay later, the company incurs an expense that reduces owner's equity and increases its liabilities
Assets = Liabilities + Owner's Capital + Revenues – Expenses – Draws