Accounting Equation and Double Entry Principle Lesson Note
Learning Objectives
This SS1 ACCOUNTING lesson note covers Accounting Equation and Double Entry Principle for First Term, Week 5.
Lesson Note
Learning Objectives
At the end of the lesson, students should be able to:
Explain the meaning of accounting equation.
State the accounting equation.
Explain the meaning of double entry principle.
Identify the debit and credit sides of an account.
Apply the accounting equation to simple business transactions.
A. Meaning of Accounting Equation
The accounting equation is a simple formula that shows the relationship between what a business owns, what it owes and the owner’s investment.
The accounting equation is:
Assets = Capital + Liabilities
B. Meaning of the Terms
1. Asset: Anything of value owned by a business.
Examples are cash, furniture, buildings, goods and motor vehicles.
2. Capital: Money or other valuables introduced into the business by the owner.
3. Liability: Money owed by the business to outsiders.
Examples are bank loans and money owed to suppliers.
Work Example
If a business has assets worth ₦100,000 and owes ₦30,000, the owner’s capital will be:
Capital = Assets − Liabilities
₦100,000 − ₦30,000 = ₦70,000
Therefore:
Assets = Capital + Liabilities
₦100,000 = ₦70,000 + ₦30,000
Meaning of Double Entry Principle
The double entry principle means that every business transaction affects at least two accounts.
For every transaction, one account is debited and another account is credited.
The total amount debited must always be equal to the total amount credited.
C. Simple Examples
1. Owner starts business with ₦50,000 cash
Cash account is debited ₦50,000 because cash enters the business.
Capital account is credited ₦50,000 because the owner’s capital increases.
2. Business buys furniture for ₦10,000 cash
Furniture account is debited ₦10,000.
Cash account is credited ₦10,000.
D. Rules of Double Entry
Every transaction has two sides.
One account is debited.
Another account is credited.
The debit amount must be equal to the credit amount.
Every transaction must be recorded in the appropriate accounts.
E. Difference Between Accounting Equation and Double Entry Principle
Accounting Equation shows the relationship between assets, capital and liabilities.
Double Entry Principle explains how each transaction is recorded by making equal debit and credit entries.
Evaluation
OBJECTIVE QUESTIONS
Objective Questions
The accounting equation is _____. A. Assets = Capital + Liabilities B. Capital = Assets + Liabilities C. Assets = Capital − Liabilities D. Liabilities = Assets + Capital
Which of the following is an asset? A. Loan B. Creditor C. Furniture D. Capital
Capital is the amount _____. A. owed to suppliers B. introduced by the owner into the business C. borrowed from the bank D. paid to workers
A liability is _____. A. what the business owns B. what the owner earns C. what the business owes D. the owner’s personal property
Double entry means that every transaction affects _____. A. one account only B. at least two accounts C. three accounts only D. no account
In double entry, the two sides are _____. A. profit and loss B. income and expenses C. debit and credit D. assets and sales
The total debit must be _____ the total credit. A. greater than B. less than C. equal to D. different from
When cash is introduced into a business by the owner, the cash account is _____. A. credited B. debited C. closed D. cancelled
If assets are ₦80,000 and liabilities are ₦20,000, the capital is _____. A. ₦20,000 B. ₦40,000 C. ₦60,000 D. ₦100,000
Furniture bought for cash will result in _____. A. furniture debited and cash credited B. cash debited and furniture credited C. both accounts debited D. both accounts credited
Theory Questions
1a) What is an accounting equation?
1b) State the accounting equations.
2a) What is an asset?
2b) Explain the double entry principle.
2c) State two rules of double entry.