The Basic Accounting Equation:
Another Viewpoint

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Next lesson: Debits and Credits

There is another viewpoint one can take of the basic accounting equation and what is known as the five elements of accounting...

The five elements of accounting

Have you ever heard of the terms financing and investing?

Financing is the act of getting money. Financing means where you get your money from. Financing is the source of money.

Investing is the spending of money.

But to spend money one would need to have it first. Thus one would always need financing to occur first before engaging in any investing activities.

Financing can be obtained from the owner or from a lender (such as the bank). Financing can also be obtained internally from the profit you make.

One can spend money on (invest in) things that provide only immediate benefits, or in things that provide continuing benefits into the future.

How do the above statements relate to the accounting equation?

Well, the elements on the right side show where money comes from. These are the sources of finance. Equity and liabilities are external sources of finance. Income is the business itself creating finance for more assets.

The two items that increase on the left side show what has been invested in. One can invest in items that provide immediate benefits (expenses) or future benefits (assets).

The telephone bill for January (for example) is an expense as the benefits for that month have been immediately consumed and there will be no more benefits arising from the January phone bill in future. (the telephone bill for February is a separate expense that will be paid later and that will provide benefits specifically for February.)

In contrast to this, a delivery vehicle purchased in January is an asset as it will provide benefits for the business well beyond January.

So we have an alternate view.

Pretty interesting, huh?

Previous lesson: Double Entry Accounting
Next lesson: Debits and Credits

Read Other Questions Relating to This Lesson
(along with their answers)

Click below to see questions and solutions on this same topic from other visitors to this page...

Journal Entry - Money Order 
Q: What is the entry for the following: Money order sent to Mohan - worth 500 Rupees. Money order commission of 10 Rupees.

Double Entry Example 
Q: Could you please show me an example of how a double entry should look? A: Take a look at this lesson, which shows the double entry for an equity …

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