The Basic Accounting Equation:
Another Viewpoint

---

Previous lesson: Double Entry Accounting 
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... 

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 only (expenses) or continuing benefits (assets). 

The water 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 water bill in future (the water 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 construction 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?

Test Yourself!

Before you start, I would recommend to time yourself to make sure that you not only get the questions right but are completing them at the right speed.

Difficulty Rating:
Beginner

Quiz length: 
3 questions

Time limit:
4 minutes

Important: The solution sheet on the following page only shows the solutions and not whether you got each of the questions right or wrong. So before you start, get yourself a piece of paper and a pen to write down your answers. Once you're done with the quiz and writing down your answers, click the Check Your Answers button at the bottom and you'll be taken to our page of solutions.

Good luck!

This Form cannot be submitted until the missing fields (labelled below in red) have been filled in
Financing and Investing Mini Quiz:
Please note that all fields followed by an asterisk must be filled in.
1. True or false: Investing is the act of getting money. *
a) True b) False
2. True or false: The elements on the right side of the accounting equation (liabilities, owner's equity and income) show where money comes from. These are the sources of finance. *
a) True b) False
3. True or false: One can spend money on items that provide immediate benefits only (expenses) or continuing benefits (assets). *
a) True b) False
First Name
E-Mail Address
Country
CountryUnited StatesCanada----------------AfghanistanAlbaniaAlgeriaAmerican SamoaAndorraAngolaAnguillaAntarcticaAntiguaArgentinaArmeniaArubaAustraliaAustriaAzerbaijanBahamasBahrainBangladeshBarbadosBelarusBelgiumBelizeBeninBermudaBhutanBoliviaBosnia and HerzegovinaBotswanaBouvet IslandBrazilBritish Indian Ocean TerritoryBritish Virgin IslandsBruneiBulgariaBurkina FasoBurundiCambodiaCameroonCape VerdeCayman IslandsCentral African RepublicChadChileChinaChristmas IslandCocos IslandsColombiaComorosCongoCook IslandsCosta RicaCroatiaCubaCyprusCzech RepublicDenmarkDjiboutiDominicaDominican RepublicEast TimorEcuadorEgyptEl SalvadorEquatorial GuineaEritreaEstoniaEthiopiaFalkland IslandsFaroe IslandsFijiFinlandFranceFrench GuianaFrench PolynesiaFrench Southern TerritoriesGabonGambiaGeorgiaGermanyGhanaGibraltarGreeceGreenlandGrenadaGrenadaGuamGuatemalaGuineaGuinea-BissauGuyanaHaitiHeard and McDonald IslandsHondurasHong KongHungaryIcelandIndiaIndonesiaIranIraqIrelandIsraelItalyIvory CoastJamaicaJapanJordanKazakhstanKenyaKiribadiNorth KoreaSouth KoreaKuwaitKyrgyzstanLaosLatviaLebanonLesothoLiberiaLibyaLiechtensteinLithuaniaLuxembourgMacaoMacedoniaMadagascarMalawiMalaysiaMaldivesMaliMaltaMarshall IslandsMartiniqueMauritaniaMauritiusMayotteMexicoFederated States of MicronesiaMoldovaMonacoMongoliaMontserratMoroccoMontenegroMozambiqueMyanmarNamibiaNauruNepalNetherlandsNetherlands AntillesNew CaledoniaNew ZealandNicaraguaNigerNigeriaNiueNorfolk IslandNorthern Mariana IslandsNorwayOmanPakistanPalauPanamaPapua New GuineaParaguayPeruPhilippinesPitcairn IslandPolandPortugalPuerto RicoQatarReunionRomaniaRussiaRwandaS. Georgia and S. Sandwich Isls.Saint Kitts and NevisSaint LuciaSaint Vincent and the GrenadinesSamoaSan MarinoSao Tome and PrincipeSaudi ArabiaSenegalSerbiaSeychellesSierra LeoneSingaporeSlovakiaSloveniaSolomon IslandsSomaliaSouth AfricaSpainSri LankaSt. HelenaSt. Pierre and MiquelonSudanSurinameSvalbardSwazilandSwedenSwitzerlandSyriaTaiwanTajikistanTanzaniaThailandTogoTokelauTongaTrinidad and TobagoTunisiaTurkeyTurkmenistanTurks and Caicos IslandsTuvaluU.S. Minor Outlying IslandsUgandaUkraineUnited Arab EmiratesUnited KingdomUruguayUzbekistanVanuatuVatican CityVenezuelaVietnamUS Virgin IslandsWallis and Futuna IslandsWestern SaharaYemenYugoslavia (former)ZaireZambiaZimbabwe
	Subscribe to Newsletter
Please enter the word that you see below.

Return from The Basic Accounting Equation: Another Viewpoint to Double Entry Accounting 

Return from The Basic Accounting Equation: Another Viewpoint to the Home Page 

Stay up to date with ABfS!
Follow us on Facebook:

---

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

---

---

---

© Copyright 2009-2023 Michael Celender. All Rights Reserved. 
Click here for Privacy Policy.

Search this site:

Stay up to date with ABfS!
Follow us on Facebook:

All the lessons on this site and much, much more...

Available Now On