Financial Accounting for Decision Makers

Assets
=
Equity
+
Liabilities
This equation – which we shall refer to as the 
accounting equation
– will always hold true. 
Whatever changes may occur to the assets of the business or the claims against it, there 
will be compensating changes elsewhere that will ensure that the statement of financial 
position always ‘balances’. By way of illustration, consider the following transactions for 
Jerry and Company:
Jerry and Company
Statement of financial position as at 1 March
£
ASSETS
Cash at bank
20,000
Total assets
20,000
EQUITY AND LIABILITIES
Equity
6,000
Liabilities – borrowing
14,000
Total equity and liabilities
20,000
M02 Atrill's Financial Accounting For Decis 51257.indd 42
18/03/2019 14:13

---

THE STATEMENT OF FINANCIAL POSITION 
43
A statement of financial position may be drawn up after each day in which transactions 
have taken place. In this way, we can see the effect of each transaction on the assets and 
claims of the business. The statement of financial position as at 2 March will be:
As we can see, the effect of buying the motor van is to decrease the balance at the bank 
by £5,000 and to introduce a new asset – a motor van – to the statement of financial posi-
tion. The total assets remain unchanged. It is only the ‘mix’ of assets that has changed.
The claims against the business remain the same because there has been no change 
in the way in which the business has been funded.
The statement of financial position as at 3 March, following the purchase of inventories, 
will be:
The effect of buying inventories has been to introduce another new asset (inventories) to 
the statement of financial position. Furthermore, the fact that the goods have not yet been 
paid for means that the claims against the business will be increased by the £3,000 owed 
to the supplier, who is referred to as a 
trade payable
(or trade creditor) on the statement 
of financial position.
2 March
Bought a motor van for £5,000, paying by cheque.
3 March
Bought inventories (that is, goods to be sold) on one month’s credit for 
£3,000. (This means that the inventories were bought on 3 March, but 
payment to the supplier will not be due until 3 April.)
4 March
Repaid £2,000 of the amount borrowed, to the lender, by cheque.
6 March
Owner introduced another £4,000 into the business bank account.