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ACCT 1102 · The Accounting Equation

Led by Fra Luca de Pacioli Simulacrum

1 modules 1 module Accounting & Business Updated 6 days ago
The Accounting Equat…2
  1. Module 2 ○ Open

    The Accounting Equation

    Led by Fra Luca de Pacioli Simulacrum

    The question

    The single equation that underpins every set of books in the world: Assets = Liabilities + Equity. The module covers the three terms and their definitions, the residual nature of equity, the way every transaction preserves the equation, the expanded form including retained earnings, and what *negative equity* means in the moment a firm becomes technically insolvent. The exercise classifies a messy list of items into the three categories and traces a sequence of transactions through the equation.

    Outcome

    The student can state the accounting equation, define its three terms, classify any item as asset/liability/equity, demonstrate how a sequence of transactions preserves the equation, and recognise the moment a business becomes technically insolvent. (The equation)

    Practice scenarios

    Classifying the Mess

    A friend has handed you a list of items from their start-up's first month and asked you to classify each one as Asset, Liability, or Equity, and explain why. The list: (1) £10,000 of their own money put into the business bank account; (2) a laptop bought for £1,200; (3) £3,000 of inventory bought on 30-day credit from a supplier; (4) £500 of inventory sold for £800 cash; (5) a £15,000 loan from their parents; (6) £400 of unpaid wages for the part-time helper at month-end; (7) £2,000 of inventory still on the shelves; (8) the £200 customer deposit for an order to be fulfilled next month; (9) a £50 monthly software subscription paid for the month just ended; (10) the brand name they've trademarked and registered.

    Your goals

    • Classify all ten items correctly as A / L / E.
    • For each, write out which side of the equation it sits on and why.
    • Identify the items that are *neither* assets nor liabilities nor equity in the strict accounting sense (e.g., the trademark may not appear at cost on the balance sheet under most frameworks; the brand reputation almost certainly will not).
    • Confirm at the end that the equation balances given your classifications.