Let’s consider an example for accounting equation article and see the effects of following hypothetical transactions on it.

1. Taken loan from bank of $10000

2. Purchased chairs and table for $2000 on cash

3. Paid the laptop supplier $3000

Starting with the first transaction of bank loan, it will affect both sides of the accounting equation i.e. bank loan will increase liabilities (loan) and assets (cash) with the same amount $10000. Now accounting equation will look like below

$14000 + $10000 = [ $4000 + $10000] + $10000
$24000 = $14000 + $10000
Transaction 1 has effect on both sides of the equation and some transaction may affect only one side as it would in transaction 2. Let’s have a look on transaction 2. Transaction 2 involve increase in one asset (chairs) and decrease in other asset (cash) with the same amount i.e. $2000. Therefore, accounting equation would now look like below
$24000 – $2000 + $2000 = $14000 + $10000
$24000 = $14000 + $10000
Note in transaction 2, because it’s affecting only one side of the accounting equation therefore one account must increase ( chairs account) and other account must decrease (cash account) keeping the equation in balance. Transaction 3 is simply payment of liability (Laptops purchase on credit) and it will affect asset (cash account) and liability (trade payable account) with the amount of $3000.
$24000 – $3000 = [$14000 – $3000] + $10000
$21000 = $11000 + $10000

Journal Entries for transactions 1, 2 and 3

accounting equation example journal entries

Exercise / Problem

Note: Try this problem at your own before "show answer"

Jennifer Corporation reported the following account balances in its financial statements:
Cash $10,000
Inventory $30,000
Equipment $45,000
Trade payable $20,000
Capital $35,000
Retained Earnings $30,000
Arrange above given account balances into the accounting equation as shown below:

Assets = Liabilities + Equity

Here we have assets (Cash, Inventory and Equipment) amounting to $85,000 ($10,000 + $30,000 + $45,000)

Liabilities (Trade payable) amounting to $20,000

and Capital (Capital and Retained Earnings) amounting to $65,000 ($35,000 + $30,000)

Putting in accounting equation we have balanced accounting equation as below

$85,000 = $20,000 + $65,000